a

GAO

United States Government Accountability Office

Report to the Chairman, Committee on 

Financial Services, House of 

Representatives

August 2005 RISK RETENTION 

GROUPS

Common Regulatory 

Standards and Greater 

Member Protections 

Are Needed

GAO-05-536
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GA0-05-536.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Richard J. 

Hillman at (202) 512-8678 or 

hillmanr@gao.gov. 

Highlights of GAO-05-536, a report to the

Chairman, Committee on Financial 

Services, House of Representatives 

August 2005

RISK RETENTION GROUPS 

Common Regulatory Standards and 

Greater Member Protections Are Needed 

RRGs have had a small but important effect in increasing the availability and 

affordability of commercial liability insurance for certain groups. While RRGs 

have accounted for about $1.8 billion or about 1.17 percent of all commercial 

liability insurance in 2003, members have benefited from consistent prices, 

targeted coverage, and programs designed to reduce risk. A recent shortage of 

affordable liability insurance prompted the creation of many new RRGs. More 

RRGs formed in 2002–2004 than in the previous 15 years—and about threequarters of the new RRGs offered medical malpractice coverage. 

 

LRRA’s partial preemption of state insurance laws has resulted in a regulatory 

environment characterized by widely varying state standards. In part, state 

requirements differ because some states charter RRGs as “captive” insurance 

companies, which operate under fewer restrictions than traditional insurers. As

a result, most RRGs have domiciled in six states that offer captive charters 

(including some states that have limited experience in regulating RRGs) rather 

than in the states where they conduct most of their business. Additionally, 

because most RRGs (as captives) are not subject to the same uniform, baseline 

standards for solvency regulation as traditional insurers, state requirements in 

important areas such as financial reporting also vary. For example, some 

regulators may have difficulty assessing the financial condition of RRGs 

operating in their state because not all RRGs use the same accounting 

principles. Further, some evidence exists to support regulator assertions that 

domiciliary states may be relaxing chartering or other requirements to attract 

RRGs. 

Because LRRA does not specify characteristics of ownership and control, or 

establish governance safeguards, RRGs can be operated in ways that do not 

consistently protect the best interests of their insureds. For example, LRRA 

does not explicitly require that the insureds contribute capital to the RRG or 

recognize that outside firms typically manage RRGs. Thus, some regulators 

believe that members without “skin in the game” will have less interest in the 

success and operation of their RRG and that RRGs would be chartered for 

purposes other than self-insurance, such as making profits for entrepreneurs 

who form and finance an RRG. LRRA also provides no governance protections 

to counteract potential conflicts of interest between insureds and management 

companies. In fact, factors contributing to many RRG failures suggest that 

sometimes management companies have promoted their own interests at the 

expense of the insureds. 

The combination of single-state regulation, growth in new domiciles, and wide 

variance in regulatory practices has increased the potential that RRGs would 

face greater solvency risks. As a result, GAO believes RRGs would benefit from 

uniform, baseline regulatory standards. Also, because many RRGs are run by 

management companies, they could benefit from corporate governance 

standards that would establish the insureds’ authority over management. 

Congress authorized the creation of

risk retention groups (RRG) to 

increase the availability and 

affordability of commercial liability 

insurance. An RRG is a group of 

similar businesses that creates its 

own insurance company to selfinsure its risks. Through the 

Liability Risk Retention Act 

(LRRA), Congress partly 

preempted state insurance law to 

create a single-state regulatory 

framework for RRGs, although 

RRGs are multistate insurers. 

Recent shortages of affordable 

liability insurance have increased 

RRG formations, but recent failures 

of several large RRGs also raised 

questions about the adequacy of 

RRG regulation. This report (1) 

examines the effect of RRGs on 

insurance availability and 

affordability; (2) assesses whether 

LRRA’s preemption has resulted in 

significant regulatory problems; 

and (3) evaluates the sufficiency of 

LRRA’s ownership, control, and 

governance provisions in 

protecting the best interests of the 

RRG insureds.

What GAO Recommends

To strengthen the overall 

regulation of RRGs, GAO 

recommends that state insurance 

regulators adopt consistent 

regulatory standards for RRGs. 

Moreover, GAO suggests that 

Congress consider (1) granting the 

partial preemption only to states 

that adopt the standards and (2) 

establishing minimum corporate 

governance standards for RRGs. 
Page i GAO-05-536 Risk Retention Groups

Contents

Letter 1

Results in Brief 5

Background 8

RRGs Have Had a Small but Important Effect on Increasing the 

Availability and Affordability of Commercial Liability

Insurance 12

LRRA’s Regulatory Preemption Has Resulted in Widely Varying 

Requirements among States and Limited Confidence in RRG 

Regulation 25

RRG Failures Have Raised Questions about the Sufficiency of LRRA 

Provisions for RRG Ownership, Control, and Governance 48

Conclusions 65

Recommendations for Executive Action 68

Matters for Congressional Consideration 68

Agency Comments and Our Evaluation 70

Appendixes

Appendix I: Objectives, Scope, and Methodology 72

Appendix II: Survey of State Regulators on Risk Retention Groups 79

Appendix III: Selected Differences between Statutory and Generally 

Accepted Accounting Principles as They Relate to Financial 

Reporting for RRGs 94

Appendix IV: Liquidated Risk Retention Groups (RRG), from 1990 through 

2003 109

Appendix V: Comments from the National Association of Insurance 

Commissioners 113

Appendix VI: GAO Contact and Staff Acknowledgments 114

Tables Table 1: Characteristics of States We Interviewed, Based on Years 

of Regulatory Experience and Number of RRGs 

Domiciled 76

Table 2: Differences in Regulatory Actions When Calculating 

Risk-Based Capital for Three RRGs, Modified GAAP 

Compared with SAP 108

Figures Figure 1: RRG Gross Premiums Written in 2003, by Time (Years) in 

Business 17
Contents

Page ii GAO-05-536 Risk Retention Groups

Figure 2: Number of RRGs, by Business Area for Selected Years 19

Figure 3: Percentage of Estimated Gross Premiums RRGs 

Collected in 2004, by Business Area 20

Figure 4: Number of RRGs, by Formation Date 23

Figure 5: Number of RRGs, by Captive or Noncaptive Charter and 

State of Domicile, as of the End of 2004 30

Figure 6: Number of RRGs Chartered, by State, as of the End of 

2004, and Amount of Direct Premiums Written by RRGs, 

by State, 2003 32

Figure 7: State Regulators’ Opinion of the Adequacy of the 

Regulatory Protections or Safeguards Built into LRRA 41

Figure 8: Permitted Wording of Guaranty Fund Disclosure in 

LRRA 60

Figure 9: The Effect of Differences in Accounting for Acquisition 

Costs on Assets, Capital, and Surplus, GAAP Compared 

with SAP 97

Figure 10: Impact of Counting an LOC and Prepaid Expenses as 

Assets on the Balance Sheet, Modified GAAP Compared 

with SAP 99

Figure 11: Impact of Counting Acquisition Costs, LOCs, and Prepaid 

Expenses as Assets on the Balance Sheet, Modified GAAP 

Compared with SAP 100

Figure 12: Differences in the Calculation of Net Premiums Written to 

Policyholders’ Surplus Ratio, Modified GAAP Compared 

with SAP 104

Figure 13: Differences in the Calculation of Reserves to 

Policyholders’ Surplus Ratio, Modified GAAP Compared 

with SAP 106
Contents

Page iii GAO-05-536 Risk Retention Groups

Abbreviations

ANLIR American National Lawyers Insurance 

Reciprocal Risk Retention Group

BRICO Beverage Retailers Insurance Company

Risk Retention Group

CEO chief executive officer

CIC Corporate Insurance Consultants

DIR Doctors Insurance Risk Retention Group

FAST Financial Analysis Solvency Tools

GAAP generally accepted accounting principles

IRIS Insurance Regulatory Information System

LOC letter of credit

LRRA Liability Risk Retention Act

NAIC National Association of Insurance

Commissioners

NPW:PS net premiums written to policyholders’

surplus

PMIC Professional Mutual Insurance Company

Risk Retention Group

RBC risk-based capital

ROA Reciprocal of America

RPG risk purchasing group

RRG risk retention group

RRR Risk Retention Reporter

SAP statutory accounting principles

SEC Securities and Exchange Commission

TAC total adjusted capital

TRA The Reciprocal Alliance Risk Retention

Group

TRG The Reciprocal Group

VSC vehicle service contract

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Page 1 GAO-05-536 Risk Retention Groups

United States Government Accountability Office

Washington, D.C. 20548

A

August 15, 2005 Letr

The Honorable Michael G. Oxley 

Chairman, Committee on Financial Services

House of Representatives

Dear Mr. Chairman:

In 1981, in response to recurring shortages of liability insurance, Congress 

passed the Product Risk Retention Liability Act, now known as the Liability 

Risk Retention Act (LRRA), which authorized the creation of risk retention 

groups (RRG) to increase the availability and affordability of commercial 

liability insurance.1

 An RRG is a group of similar businesses with similar 

risk exposures, such as educational institutions or building contractors, 

which create their own insurance company to self-insure their risks on a 

group basis.2

 Through LRRA, Congress first established a flexible 

framework that allowed states to develop their own standards for the 

formation and operation of RRGs. In light of the recent unavailability of 

affordable liability insurance, especially for medical malpractice coverage, 

interest in forming RRGs has greatly increased. In addition, some industry 

advocates now propose that RRGs be permitted to offer property coverage 

as well. However, the recent and notable failures of several large RRGs 

have raised questions about the adequacy of the RRG regulatory 

environment and whether existing safeguards, such as the requirement that 

each RRG provide copies of operational plans and annual financial 

statements to each state in which it operates, are sufficient to ensure that 

RRGs are operated and governed adequately to protect their insureds. 

1

Pub. L. No. 97-45, 95 Stat. 949 (1981) (codified as amended at 15 U.S.C. §§ 3901-3906). LRRA 

authorized the creation of RRGs and risk purchasing groups (RPG). RPGs are businesses 

with similar risk exposures that join to purchase liability insurance as a single entity. See 15 

U.S.C. § 3901(a)(5). We do not evaluate RPGs in this report. See also GAO, Insurance: 

Activity under the Product Liability Risk Retention Act of 1981, GAO/HRD-86-120BR

(Washington, D.C.: July 1986).

2

The specific definitional requirements are set forth in 15 U.S.C. § 3901(a)(4). 
Page 2 GAO-05-536 Risk Retention Groups

LRRA, expanded in 1986, facilitates the creation and operation of RRGs in 

several ways.3

 Most notably, LRRA partially preempts state insurance laws 

by allowing an RRG’s formation and operations to be regulated primarily by 

the state in which it is chartered, its domiciliary state, even when it sells 

insurance in other states. LRRA largely limits the oversight role of 

insurance regulators from nondomiciliary states (all states other than the 

chartering state) to the right to receive copies of an RRG’s operational 

plans and annual financial statements. In having only one regulator, RRGs 

differ from “traditional” insurance companies, which are subject to 

licensing and oversight by regulators in each state in which they operate. 

Additionally, LRRA prohibits RRGs from participating in state guaranty 

funds, which are available to settle the claims of insureds of a traditional 

insurance company should that company fail. 

LRRA’s legislative history indicates a view that single-state regulation 

would provide adequate supervision of RRGs, largely because RRGs would 

be providing insurance coverage only to their own members, and not the 

public at large. While preemption is central to LRRA’s objective of 

facilitating the formation and efficient interstate operation of RRGs, 

Congress also expressed a view that LRRA’s prohibition on participating in 

guaranty funds would provide a strong incentive for RRGs to set adequate 

premiums and establish adequate reserves, as each RRG member would 

know that there would be no other source of funds (other than the RRG’s 

own assets) from which to pay claims.4

 

RRGs are not the only mechanism by which businesses may establish selfinsurance coverage. States also charter and regulate captive insurance 

companies, which are established by single companies or groups of 

companies to self-insure their own risks. Traditional insurance companies 

sell insurance to the general public and are licensed in all states in which 

they do business. In contrast, captive insurance companies largely insure 

only their owners, who have the ability to manage and retain their own risk. 

Thus, the degree of regulatory oversight required for captives is different 

3

Prior to its expansion in 1986, LRRA only permitted RRGs to provide product liability 

insurance. As amended in 1986, the act permits RRGs to offer all types of liability insurance, 

excluding worker’s compensation. The 1986 amendments also expanded the ability of 

nondomiciliary states to regulate RRGs doing business in their states.

4

Insurance insolvency guaranty funds are maintained by contributions of insurance 

companies operating in a particular state and made available to pay the claims of insolvent 

insurance companies.
Page 3 GAO-05-536 Risk Retention Groups

than that which is required for commercial insurers. States chartering 

captives offer some regulatory relief to these companies, based on the 

presumption that the owners of captive companies have sophisticated 

knowledge about managing their own risks and are motivated to protect 

their own interests. The captive is licensed in only one state and operates 

under the captive insurance law of that domicile. However, should the 

captive choose to conduct business outside its state of domicile, it would 

be subject to the licensing and oversight of each state because captives that 

are not also RRGs do not benefit from the partial preemption. Many states 

have recognized RRGs as a form of captive and charter them under their 

captive regulations. 

In light of proposals to expand LRRA, and recent shortages of affordable 

liability insurance, you requested that we assess how well RRGs have 

achieved LRRA’s legislative goals of making commercial liability insurance 

available and affordable. This report (1) examines the effect RRGs have 

had on the availability and affordability of commercial liability insurance; 

(2) assesses whether LRRA’s partial preemption of state insurance laws has 

resulted in any significant regulatory problems; and (3) evaluates the 

sufficiency of LRRA’s ownership, control, and governance provisions for 

protecting the best interests of the insureds. 
Page 4 GAO-05-536 Risk Retention Groups

To ascertain the effect of RRGs on the availability and affordability of 

commercial liability insurance, we surveyed regulators in all 50 states and 

the District of Columbia and interviewed representatives from eight RRGs 

serving different markets. In addition, we obtained information from the 

National Association of Insurance Commissioners (NAIC) that estimated 

the share of the commercial liability insurance market that RRGs held in 

2003.5

 To determine if LRRA’s partial preemption of state insurance laws 

has resulted in significant regulatory problems, we surveyed all state 

insurance departments to obtain information on their regulatory 

experiences and obtained more specific information from regulators in 14 

states, including some that do not domicile RRGs. To understand the 

regulatory framework, especially the capitalization and financial reporting 

standards under which most RRGs are regulated, we compared the 

regulatory standards of the six states (Arizona, the District of Columbia, 

Hawaii, Nevada, South Carolina, and Vermont) that had chartered the most 

RRGs as of June 30, 2004. To assess the sufficiency of LRRA’s ownership, 

control, and governance provisions in protecting the best interests of the 

insureds, we identified provisions in LRRA that relate to these issues and 

reviewed LRRA’s legislative history to ascertain Congress’ concerns about 

these issues.6

 Since LRRA largely delegates the regulation of the formation 

and operation of RRGs to the domiciliary states, we reviewed the statutory 

provisions of the six leading domiciliary states to determine whether they 

addressed ownership, control, and governance, and interviewed their 

regulators to identify insurance departmental policies. To understand how 

the regulators implemented these statutes and policies, we reviewed the 

chartering documents of the three RRGs most recently domiciled by each 

of the leading domiciliary states. Finally, we identified whether factors 

related to the ownership, control, or governance of RRGs contributed or, in 

some cases, were alleged to have contributed to RRG failures. We 

conducted our review from November 2003 through July 2005 in 

accordance with generally accepted government auditing standards. 

Appendix I contains a more detailed description of our objectives, scope, 

and methodology.

5

NAIC is a voluntary association of the heads of insurance departments from each state, the 

District of Columbia, and five U.S. territories. For the purpose of this report, we refer to the 

District of Columbia as a state. NAIC provides a national forum for addressing and resolving 

major insurance issues, including those concerning RRGs, and for promoting the 

development of consistent policies among the states.

6

By governance, we mean the manner in which an RRG’s governing body, such as a board of 

directors, and management direct and control the RRG, including the means by which 

directors and management are held accountable for their actions.
Page 5 GAO-05-536 Risk Retention Groups

Results in Brief RRGs have had a small but important effect in increasing the availability 

and affordability of commercial liability insurance for certain groups with 

limited access to insurance. In 2003, according to NAIC estimates, RRGs 

provided about $1.8 billion or 1.17 percent of all commercial liability 

insurance. While the overall impact on the liability market has been small, 

most state regulators we surveyed believed that RRGs have increased the 

availability and affordability of insurance for groups that have had 

difficulties obtaining affordable coverage such as healthcare providers, 

building contractors, and commercial trucking firms. According to state 

regulators and RRG industry representatives, members have benefited in 

several important ways by using RRGs to self-insure their risks.7

 These 

benefits include controlling their costs by targeting their coverage to the 

specific needs of members and designing programs to reduce risks. The 

representatives indicated that RRGs might not always benefit from the 

lowest insurance prices but could benefit from prices that remained stable 

over time. In recent years, a shortage of affordable liability insurance also 

prompted the creation of many new RRGs. From 2002 through 2004, 117 

RRGs were formed, more than the total formed over the previous 15 years. 

In particular, a shortage of affordable medical malpractice insurance 

prompted healthcare providers to form about three-quarters of the new 

RRGs. As a result, more than half of all currently operating RRGs provide 

insurance in healthcare-related areas. 

LRRA’s partial preemption of state insurance laws has resulted in a 

regulatory environment characterized by widely varying state standards 

and limited regulator confidence in the system. In part, state requirements 

differ because some states charter RRGs as captive insurance companies, 

which operate under less restrictive regulation than traditional insurers. A 

captive charter offers RRGs several advantages: For example, initial 

capitalization standards are usually easier to meet because states allow 

captives to start their operations with less capital than traditional insurers 

and use letters of credit rather than cash to meet capitalization 

requirements. As a result of these and other advantages, the majority of 

RRGs have domiciled in six states—Arizona, the District of Columbia, 

Hawaii, Nevada, South Carolina, and Vermont—that allow them to be 

chartered as captive insurers rather than in the states where they conduct 

7

In order to obtain more specific examples about how RRGs have benefited their 

membership, we interviewed and reviewed documents from eight RRGs representing a 

variety of industries, most of which have been in business for at least 5 years. See appendix 

I for more information.
Page 6 GAO-05-536 Risk Retention Groups

most of their business. In addition, states chartering RRGs as captives also 

vary in how they regulate RRGs on an ongoing basis. These variations exist 

because LRRA grants domiciliary states the discretion and authority to 

regulate the formation and multistate operation of RRGs and because as 

captives most RRGs are not subject to uniform, baseline standards, such as 

those set forth in NAIC’s financial accreditation standards for regulation of 

traditional multistate insurers. For example, five of the six leading 

domiciliary states allow RRGs to use a modified version of generally 

accepted accounting principles (GAAP), rather than statutory accounting 

principles (SAP), when filing financial statements. As a result, some 

nondomiciliary state regulators have difficulty interpreting these reports, 

especially since traditional insurers must file using SAP. Additionally, only 8 

regulators of 42 responding to a particular survey question considered that 

LRRA’s provisions adequately protected RRG insureds, often because of 

their concerns about a lack of uniform, baseline standards and perception 

that they needed additional regulatory authority. Finally, some evidence 

exists to support regulator assertions that some domiciliary states may be 

creating lenient regulatory environments to encourage RRGs to domicile in 

their state. For example, in the past 4 years, two leading domiciliary states 

have allowed RRGs to relocate their charters, even though the RRGs were 

subject to unresolved regulatory actions in their original state of domicile. 

Because (other than requiring that owners must also be insureds) LRRA 

does not impose minimum characteristics of ownership and control for 

RRGs or establish minimum governance requirements, RRGs can be 

operated in ways that do not consistently protect the best interests of their 

insureds. While RRGs were authorized for the purpose of providing selfinsurance, LRRA does not explicitly require that all of the insureds 

contribute toward the capitalization of the RRG. Consequently, some of the 

six leading domiciliary states do not expect RRG insureds to contribute 

anything more than insurance premiums, and some regulators are 

concerned that members without “skin in the game” will have less interest 

in the success of their RRG. In addition, even though LRRA’s legislative 

history indicates that the single-state regulatory framework was premised, 

in part, on insureds having adequate incentives to exercise control over 

their RRG, some of the six leading domiciliary states do not expect 

insureds to have the ability to elect their governing body (such as a board 

of directors). Because not all insureds actually participate in the formation 

or financing of their RRGs, some regulators are concerned that those RRGs 

may be operated for the financial benefit of the “entrepreneurs” who do 

provide the financing. An entrepreneur could be an individual insured or 
Page 7 GAO-05-536 Risk Retention Groups

the company hired to manage the daily operations of the RRG. LRRA also 

does not include provisions regarding the management of RRGs, such as 

governance protections to counteract potential conflicts of interest 

between management companies and insureds. In contrast, Congress 

previously addressed a similar situation within the mutual fund industry by 

passing legislation intended to minimize potential conflicts of interest 

between mutual fund shareholders and management companies. The 

circumstances surrounding more than half of past RRG failures we 

examined suggest that management companies or managers have 

promoted their own interests at the expense of the insureds—for example, 

by charging excessive management fees or promoting transactions 

unfavorable to the RRG. Regulators knowledgeable about these failures 

said that the insureds likely were more interested in obtaining affordable 

insurance than assuming the responsibilities of owning an insurance 

company. Consequently, even though an insured’s insurance policy may 

have stated that the RRG lacked guaranty fund coverage, the insureds may 

not have been fully aware of this restriction or the consequences of lacking 

such protection. Further, LRRA does not require RRGs to disclose to 

prospective claimants, those who submit claims for loss, that the RRGs 

would not benefit from guaranty fund protection should they fail. This can 

be of special consequence to certain claimants—consumers who purchase 

extended service contracts from the insureds of RRGs—because contracts 

issued by these insureds take on the appearance of insurance when, in 

most cases, they are not.

This report contains recommendations for the states, as well as matters for 

congressional consideration that, if implemented, would create a more 

consistent regulatory framework for overseeing the chartering and 

management of RRGs, provide more reliable information about the 

financial condition of RRGs, and provide RRG members needed 

protections to help ensure that companies managing RRGs operate in the 

insureds’ best interests. In addition, enhancing the availability and contents 

of the guaranty fund disclosure would provide RRG insureds, as well as 

consumers who purchase extended service contracts from RRG insureds, a 

better understanding of the lack of guaranty fund coverage. Finally, these 

recommendations would strengthen NAIC’s ability to achieve its goals of 

improving the quality and consistency of state insurance regulation. 

We requested comments on a draft of this report from NAIC. The Executive 

Vice President and CEO, National Association of Insurance 

Commissioners, provided written comments on a draft of this report. NAIC 

generally agreed with our approach and methodology and our description 
Page 8 GAO-05-536 Risk Retention Groups

of the regulation of risk retention groups. NAIC’s comments are discussed 

later in this report and are reprinted in appendix V. NAIC and several of the 

states also provided technical comments, which we incorporated as 

appropriate.

Background In the legislative history, RRGs were described as essentially insurance 

“cooperatives,” whose members pool funds to spread and assume all or a 

portion of their own commercial liability risk exposure—and who are 

engaged in businesses and activities with similar or related risks.8

 

Specifically, RRGs may be owned only by individuals or businesses that are 

insured by the RRG or by an organization that is owned solely by insureds 

of the RRG.9

 In the legislative history, Congress expressed the view that 

RRGs had the potential to increase the availability of commercial liability 

insurance for businesses and reduce liability premiums, at least when 

insurance is difficult to obtain (during hard markets) because members 

would set rates more closely tied to their own claims experience. In 

addition, LRRA was intended to provide businesses, especially small ones, 

an opportunity to reduce insurance costs and promote greater competition 

among insurers when they set insurance rates.10 Because RRGs are owned 

by insureds that may have business assets at risk should the RRG be unable 

to pay claims, they would have greater incentives to practice effective risk 

management both in their own businesses and the RRG. The elimination of 

duplicative and sometimes contradictory regulation by multiple states was 

designed to facilitate the formation and interstate operation of RRGs.11

“The (regulatory) framework established by LRRA attempts to strike a 

balance between the RRGs’ need to be free of

8

Liability insurance includes coverage for all sums that the insured becomes legally 

obligated to pay because of bodily injury, property damage, or other wrongs to which an 

insurance policy could apply.

9

15 U.S.C. § 3902(a)(4)(E). 

10See H. Rep. No. 97-190, at 4 (1981), reprinted in 1981 U.S.C.A.A.N. 1432, 1441; S. Rep. No. 

97-172, at 1 (1981). 

11See H. Rep. No. 97-190, at 12 (1981), reprinted in 1981 U.S.C.A.A.N. 1432, 1441; S. Rep. 97-

172, at 11 (1981).
Page 9 GAO-05-536 Risk Retention Groups

unjustified requirements and the public’s need for protection from 

insolvencies.”12 

RRGs are not the only form of self-insurance companies; “captive 

insurance companies” (captives) also self-insure the risks of their owners. 

States can charter RRGs under regulations intended for traditional insurers 

or for captive insurers. Non-RRG captives largely exist solely to cover the 

risks of their parent, which can be one large company (pure captive) or a 

group of companies (group captives).13 Group captives share certain 

similarities with RRGs because they also are composed of several 

companies, but group captives, unlike RRGs, do not have to insure similar 

risks. Further, captives may provide property coverage, which RRGs may 

not. Regulatory requirements for captives generally are less restrictive than 

those for traditional insurance companies because, for example, many pure 

captives are wholly owned insurance subsidiaries of a single business or 

organization. If a pure captive failed, only the assets of the parent would be 

at risk. Finally, unlike captive RRGs, other captive insurers generally 

cannot conduct insurance transactions in any state except their domiciliary 

state, unless they become licensed in that other state (just as a traditional 

company would) and subject to that state’s regulatory oversight.14 

12See H. Rep. No. 99-865, at 12 (1986), reprinted in 1986 U.S.C.A.A.N. 5303, 5309; S. Rep. No. 

99-294, at 13-14 (1986).

13Other variations of captive insurance companies exist. For example, a hybrid form of the 

captive company is the trade association or industry captive, which is formed and operated 

by a business fraternal organization or trade association. 

14To address the potential complexities of multiple state regulation, when captives do need 

to sell in other states, they typically pay another insurance company already admitted (that 

is, licensed to operate) by that state, known as a fronting company, to issue policies. The 

fronting company then insures the risks back to the captive. 
Page 10 GAO-05-536 Risk Retention Groups

In contrast to the single-state regulation that LRRA provides for RRGs, 

traditional insurers, as well as other non-RRG captive insurers, are subject 

to the licensing requirements and oversight of each nondomiciliary state in 

which they operate. The licensing process allows states to determine if an 

insurer domiciled in another state meets the nondomiciliary state’s 

regulatory requirements before granting the insurer permission to operate 

in its state. According to NAIC’s uniform application process, which has 

been adopted by all states, an insurance company must show that it meets 

the nondomiciliary state’s minimum statutory capital and surplus 

requirements, identify whether it is affiliated with other companies (that is, 

part of a holding company system), and submit biographical affidavits for 

all its officers, directors, and key managerial personnel.15 After licensing an 

insurer, regulators in nondomiciliary states can conduct financial 

examinations, issue an administrative cease and desist order to stop an 

insurance company from operating in their state, and withdraw the 

company’s license to sell insurance in the state. However, most state 

regulators will not even license an insurance company domiciled in another 

state to operate in their state unless the company has been in operation for 

several years. As reflected in each state’s “seasoning requirements,” an 

insurance company must have successfully operated in its state of domicile 

for anywhere from 1 to 5 years before qualifying to receive a license from 

another state.16 RRGs, in contrast, are required only to register with the 

regulator of the state in which they intend to sell insurance and provide 

copies of certain documents originally provided to domiciliary regulators.

15NAIC has developed an application process allowing insurers to file copies of the same 

application for admission in numerous states. This application is designed for established, 

solidly performing companies that are in good standing in their domiciliary state. 

16These requirements are known as “seasoning requirements for authority to transact 

business.” 
Page 11 GAO-05-536 Risk Retention Groups

Although RRGs receive regulatory relief under LRRA, they still are 

expected to comply with certain other laws administered by the states in 

which they operate, but are not chartered (nondomiciliary states), and are 

required to pay applicable premium and other taxes imposed by 

nondomiciliary states.17 In addition to registering with other states, LRRA 

also imposes other requirements that offer protections or safeguards to 

RRG members: LRRA requires each RRG to (1) provide a plan of operation 

to the insurance commissioner of each state in which it plans to do 

business prior to offering insurance in that state, (2) provide a copy of the 

group’s annual financial statement to the insurance commissioner of each 

state in which it is doing business, and (3) submit to an examination by a 

nondomiciliary state regulator to determine the RRG’s financial condition, 

if the domiciliary state regulator has not begun or refuses to begin an 

examination. Nondomiciliary, as well as domiciliary states, also may seek 

an injunction in a “court of competent jurisdiction” against RRGs that they 

believe are in hazardous financial condition.18

In conjunction with the regulatory relief Congress granted to RRGs, it 

prohibited RRGs from participating in state guaranty funds, believing that 

this restriction would provide RRG members a strong incentive to establish 

adequate premiums and reserves. All states have established guaranty 

funds, funded by insurance companies, to pay the claims of policyholders 

in the event that an insurance company fails. Without guaranty fund 

protection, in the event an RRG becomes insolvent, RRG insureds and their 

claimants could be exposed to all losses resulting from claims that exceed 

the ability of the RRG to pay. 

17LRRA provides a list of powers retained by nondomiciliary states, including the authority 

to require RRGs to comply with laws regarding unfair claim settlement practices and unfair 

trade and deceptive practices. See 15 U.S.C. § 3902(a)(1). Further, LRRA’s exemption does 

not extend to laws governing business and industry generally, such as civil rights laws, 

generally applicable criminal laws, and corporate laws.

18See 15 U.S.C. § 3902(a)(1)(H).
Page 12 GAO-05-536 Risk Retention Groups

Finally, in terms of structure, RRG and captive insurance companies bear a 

certain resemblance to mutual fund companies.19 For example, RRGs, 

captive insurance companies, and mutual fund companies employ the 

services of a management company to administer their operations. RRGs 

and captive insurers generally hire “captive management” companies to 

administer company operations, such as day-to-day operational decisions, 

financial reporting, liaison with state insurance departments, or locating 

sources of reinsurance.20 Similarly, a typical mutual fund has no employees 

but is created and operated by another party, the adviser, which contracts 

with the fund, for a fee, to administer operations. For example, the adviser 

would be responsible for selecting and managing the mutual fund’s 

portfolio. However, Congress recognized that the external management of 

mutual funds by investment advisers creates an inherent conflict between 

the adviser’s duties to the fund shareholders and the adviser’s interests in 

maximizing its own profits, a situation that could adversely affect fund 

shareholders. One way in which Congress addressed this conflict is the 

regulatory scheme established by the Investment Company Act of 1940, 

which includes certain safeguards to protect the interests of fund 

shareholders. For example, a fund’s board of directors must contain a 

certain percentage of independent directors—directors without any 

significant relationship to the advisers.

RRGs Have Had a 

Small but Important 

Effect on Increasing 

the Availability and 

Affordability of 

Commercial Liability 

Insurance

RRGs have had a small but important effect on increasing the availability 

and affordability of commercial liability insurance, specifically for groups 

that have had limited access to liability insurance. According to NAIC 

estimates, in 2003 RRGs sold just over 1 percent of all commercial liability 

insurance in the United States. However, many state regulators, even those 

who had reservations about the regulatory oversight of RRGs, believe 

RRGs have filled a void in the market. Regulators from the six leading 

domiciliary states also observed that RRGs were important to certain 

groups that could not find affordable coverage from a traditional insurance 

company and offered RRG insureds other benefits such as tailored 

19Mutual funds are distinct legal entities owned by their shareholders and permit 

shareholders to invest in an array of securities such as stocks issued by public corporations. 

See GAO, Mutual Fund Fees: Additional Disclosure Could Encourage Price Competition, 

GAO/GGD-00-126 (Washington, D.C.: June 2000) for additional information.

20Reinsurance is a form of insurance that insurance companies buy for their own protection. 

Insurance companies purchase reinsurance to reduce their possible maximum loss by giving 

(ceding) a portion of their liability to reinsurance companies.
Page 13 GAO-05-536 Risk Retention Groups

coverage. Furthermore, RRGs, while tending to be relatively small in size 

compared with traditional insurers, serve a wide variety of organizations 

and businesses, although the majority served the healthcare industry. 

Difficulties in finding affordable commercial liability insurance prompted 

the creation of more RRGs from 2002 through 2004 than in the previous 15 

years. Three-quarters of the RRGs formed in this period responded to a 

recent shortage of, and high prices for, medical malpractice insurance. 

However, studies have characterized the medical malpractice industry as 

volatile because of the risks associated with providing this line of 

insurance. 

RRGs Have Represented a 

Small but Increasing Part of 

the Commercial Liability 

Insurance Market 

RRGs have constituted a very small part of the commercial liability market. 

According to NAIC estimates, in 2003 a total of 115 RRGs sold 1.17 percent 

of all commercial liability insurance in the United States. This accounted 

for about $1.8 billion of a total of $150 billion in gross premiums for all 

commercial liability lines of insurance.21 We are focusing on 2003 market 

share to match the time frame of our other financial analyses of gross 

premiums. 

While RRGs’ share of the commercial liability market was quite small, 

market share and the overall amount of business RRGs wrote increased 

since 2002. For example, RRG market share increased from 0.89 percent in 

2002 to 1.46 percent in 2004.22 However, in terms of commercial liability 

gross premiums, the increase in the amount of business written by RRGs is 

more noticeable. The amount of business that RRGs collectively wrote 

about doubled, from $1.2 billion in 2002 to $2.3 billion in 2004. During this 

same period, the amount of commercial liability written by traditional 

insurers increased by about 21 percent, from $129 billion to $156 billion. In 

addition, RRGs increased their presence in the market for medical 

malpractice insurance. From 2002 through 2004, the amount of medical 

malpractice written by RRGs increased from $497 million to $1.1 billion, 

21In 2003, 127 RRGs were licensed to write business but we asked NAIC to include only the 

115 RRGs that actively wrote premiums. NAIC’s analysis is based on the amount of gross 

premiums written by RRGs divided by the total amount of gross premiums written by all 

insurers for commercial liability insurance. Gross premiums represent the total amount of 

business that an insurance company sells (direct premiums) plus business assumed from 

other carriers (assumed premiums). 

22We verified that NAIC’s 2003 data correctly listed RRGs—that is, did not inadvertently 

include or omit any insurers. However, we did not perform this verification for the 2002 or 

2004 data. 
Page 14 GAO-05-536 Risk Retention Groups

which increased their share of the medical malpractice market from 4.04 

percent to 7.27 percent.

According to State 

Regulators, RRGs Have 

Filled Voids in Markets, 

Allowing Numerous Groups 

to Obtain Benefits of 

Coverage 

Despite the relatively small share of the market that RRGs hold, most state 

regulators we surveyed who had an opinion—33 of 36—indicated that 

RRGs have expanded the availability and affordability of commercial 

liability insurance for groups that otherwise would have had difficulty in 

obtaining coverage.23 This consistency of opinion is notable because 18 of 

those 33 regulators made this assertion even though they later expressed 

reservations about the adequacy of LRRA’s regulatory safeguards.24 About 

one-third of the 33 regulators also made more specific comments about the 

contributions of RRGs. Of these, five regulators reported that RRGs had 

expanded the availability of medical malpractice insurance for nursing 

homes, adult foster care homes, hospitals, and physicians. One regulator 

also reported that RRGs had assisted commercial truckers in meeting their 

insurance needs.

Regulators from states that had domiciled the most RRGs as of the end of 

2004—Arizona, the District of Columbia, Hawaii, Nevada, South Carolina, 

and Vermont—provided additional insights.25 Regulators from most of 

these states recognized that the overall impact of RRGs in expanding the 

availability of insurance was quite small. However, they said that the 

coverage RRGs provided was important because certain groups could not 

find affordable insurance from a traditional insurance company. All of 

these regulators cited medical malpractice insurance as an area where 

RRGs increased the affordability and availability of insurance but they also 

identified other areas. For example, regulators from Hawaii and Nevada 

reported that RRGs have been important in addressing a shortage of 

insurance for construction contractors. The six regulators all indicated (to 

some extent) that by forming their own insurance companies, RRG 

members also could control costs by designing insurance coverage 

23We surveyed insurance departments from all 50 states and the District of Columbia about 

their regulatory experiences with RRGs. Of these, all but one—the State of Maryland—

responded to our survey. Of the respondents, 36 gave an opinion for the question on whether 

RRGs had expanded the availability and affordability of insurance.

24For more information, see the next section where we present the results of regulatory 

responses to the questions on the adequacy of LRRA’s safeguards.

25As of the end of 2004, these six states had chartered 88 percent of all RRGs.
Page 15 GAO-05-536 Risk Retention Groups

targeted to their specific needs and develop programs to reduce specific 

risks. In contrast, as noted by the Arizona regulator, traditional insurers 

were likely to take a short-term view of the market, underpricing their 

coverage when they had competition and later overpricing their coverage 

to recoup losses. He also noted insurers might exit a market altogether if 

they perceived the business to be unprofitable, as exemplified in the 

medical malpractice market. Regulators from Vermont and Hawaii, states 

that have the most experience in chartering RRGs, added that successful 

RRGs have members that are interested in staying in business for the “long 

haul” and are actively involved in running their RRGs. RRG representatives 

added that RRG members, at any given time, might not necessarily benefit 

from the cheapest insurance prices but could benefit from prices that were 

stable over time. Additionally, as indicated by trade group representatives, 

including the National Risk Retention Association, RRGs have proved 

especially advantageous for small and midsized businesses. 

In order to obtain more specific information about how RRGs have 

benefited their membership, we interviewed representatives of and 

reviewed documents supplied by six RRGs that have been in business for 

more than 5 years, as well as two more recently established RRGs. Overall, 

these eight RRGs had anywhere from 2 to more than 14,500 members.26 

They provided coverage to a variety of insureds, including educational 

institutions, hospitals, attorneys, and building contractors. The following 

three examples illustrate some of the services and activities RRGs provide 

or undertake. 

• An RRG that insures about 1,100 schools, universities, and related 

organizations throughout the United States offers options tailored to its 

members, such as educators’ legal liability coverage and coverage for 

students enrolled in courses offering off-campus internships. According 

to an RRG representative, the RRG maintains a claims database to help 

it accurately and competitively price its policies. Members also benefit 

from risk-management services, such as training and courses on sexual 

harassment and tenure litigation, and work with specialists to develop 

loss-control programs.

• An RRG that reported that it insures 730 of the nation’s approximately 

3,000 public housing authorities provides coverage for risks such as 

pesticide exposure, law enforcement liability, and lead-based paint 

26The RRG with more than 14,500 members serves attorneys.
Page 16 GAO-05-536 Risk Retention Groups

liability. The RRG indicated that while premium rates have fluctuated, 

they are similar to prices from about 15 years ago. The RRG also offers 

risk-management programs, such as those for reducing fires, and also 

reported that as a result of conducting member inspections it recently 

compiled more than 2,000 recommendations on how to reduce covered 

risks. 

• An RRG that primarily provides insurance to about 45 hospitals in 

California and Nevada offers general and professional coverage such as 

personal and bodily injury and employee benefit liability. The RRG also 

offers a variety of risk-management services specifically aimed at 

reducing losses and controlling risks in hospitals. According to an RRG 

official, adequately managing risk within the RRG has allowed for more 

accurate pricing of the liability coverage available to members. 

RRGs Have Remained 

Relatively Small in Size 

Compared with Traditional 

Insurers but Serve a Wide 

Variety of Markets

Generally, RRGs have remained relatively small compared with traditional 

insurers. Based on our analysis of 2003 financial data submitted to NAIC, 47 

of the 79 RRGs (almost 60 percent) that had been in business at least 1 year, 

wrote less than $10 million in gross premiums, whereas only 644 of 2,392 

traditional insurers (27 percent) wrote less than $10 million. In contrast, 

1,118 traditional insurers (almost 47 percent) wrote more than $50 million 

in gross premiums for 2003 compared with six RRGs (8 percent). Further, 

these six RRGs (all of which had been in business for at least 1 year) 

accounted for 52 percent of all gross premiums that RRGs wrote in 2003. 

This information suggests that just a few RRGs account for a 

disproportionate amount of the RRG market.

Additionally, RRGs that wrote the most business tended to have been in 

business the longest. For example, as measured by gross premiums 

written, of the 16 RRGs that sold more than $25 million annually, 14 had 

been in business 5 years or more (see fig. 1). Yet, the length of time an RRG 

has been in operation is not always the best predictor of an RRG’s size. For 

example, of the 51 RRGs that had been in business for 5 or more years, 27 

still wrote $10 million or less in gross premiums.
Page 17 GAO-05-536 Risk Retention Groups

Figure 1: RRG Gross Premiums Written in 2003, by Time (Years) in Business

a

This figure compares the amount of gross premiums written in 2003 by the 79 RRGs that had been in 

business for at least 1 year. Of the 79, 51 had at least 5 years of business experience, and 28 had 

between 1 and 5 years. 

0

5

10

15

20

Greater

than $100

Greater than $25

to 100

Greater than $10

to 25

Less than $2 $2 to 10

5 years or more

1 year but less than 5 years

Gross premiums (in millions)

Number of RRGs

Source: GAO analysis of NAIC data.

3

0

11

2

10

6

18

14

9

6
Page 18 GAO-05-536 Risk Retention Groups

According to the Risk Retention Reporter (RRR), a trade journal that has 

covered RRGs since 1986, RRGs insure a wide variety of organizations and 

businesses.27 According to estimates published in RRR, in 2004 105 RRGs 

(more than half of the 182 in operation at that time) served the healthcare 

sector (for example, hospitals, nursing homes, and doctors). In 1991, RRGs 

serving physicians and hospitals accounted for about 90 percent of 

healthcare RRGs. However, by 2004, largely because of a recent increase in 

nursing homes forming RRGs, this percentage decreased to about 74 

percent.28 In addition, in 2004, 21 RRGs served the property development 

area (for example, contractors and homebuilders), and 20 served the 

manufacturing and commerce area (for example, manufacturers and 

distributors). Other leading business areas that RRGs served include 

professional services (for example, attorneys and architects), and 

government and institutions (for example, educational and religious 

institutions). Figure 2 shows how the distribution of RRGs by business area 

has changed since 1991. 

27Since NAIC does not collect information on the business areas served by insurance 

companies, including RRGs, we obtained this information from RRR. Over the years, RRR 

has surveyed RRGs, for example, asking RRGs to project their premiums. The 2004 data we 

cited are based on projections published by RRR in its October 2004 issue. To arrive at these 

estimates, RRR projected the total number of RRGs based on the number it identified 

operating as of the end of September 2004 and the total amount of premium based on 

information obtained from its annual survey of RRGs. For 2004, RRR reported a survey 

response rate of about 75 percent.

28In 2004, according to our analysis of RRG information collected by RRR, about 43 percent 

(45) of healthcare RRGs insured hospitals and their affiliates, 31 percent (33) insured 

physicians, and 18 percent (19) served nursing homes. However, the number of RRGs 

covering hospitals and physicians has increased since 1991. In 1991, 8 RRGs provided 

coverage to hospitals and their affiliates, and 13 RRGs provided coverage to physicians. 
Page 19 GAO-05-536 Risk Retention Groups

Figure 2: Number of RRGs, by Business Area for Selected Years

a

The RRG numbers that RRR projected for 2004 are based on the number of RRGs the journal 

identified operating as of the end of September 2004. For each year, we show only the four business 

areas with the highest number of RRGs, and group all other areas in a fifth category. 

All other RRGs

Professional services

Government and institutions

Manufacturing and commerce

Healthcare

All other RRGs

Professional services

Government and institutions

Manufacturing and commerce

Healthcare

18

11

10

7

27

9

10

12

23

16

12

9

12

23

All other RRGs

Property development

Professional services

Manufacturing and commerce

Healthcare

25

21

11

20

105

25

All other RRGs

Property development

Transportation

Manufacturing and commerce

Healthcare

Year Number of RRGs

Source: Risk Retention Reporter.

All other RRGs

Property development

Transportation

Professional services

Government and institutions

Manufacturing and commerce

Healthcare

1991

1996

2001

2004a

Business area
Page 20 GAO-05-536 Risk Retention Groups

Additionally, according to RRR’s estimates, almost half of all RRG 

premiums collected in 2004 were in the healthcare area (see fig. 3). The 

professional services and government and institutions business areas 

accounted for the second and third largest percentage of estimated gross 

premiums collected, respectively.29

Figure 3: Percentage of Estimated Gross Premiums RRGs Collected in 2004, by 

Business Area 

Note: Gross premium data estimates are based on information RRR collected from RRGs during a 

2004 survey. RRR reported projections for all of 2004 in October 2004.

29While relatively few in number, RRGs serving the professional services business area still 

accounted for a high percentage of estimated gross premiums written by RRGs. One reason 

may be membership numbers. According to RRR, RRGs in the professional services 

business area had the highest number of members of all business areas. 

2% Environmental

3% Transportation

4% Manufacturing and commerce

Property development

Government and institutions

Professional services

Healthcare

49%

25%

10%

7%

Source: Risk Retention Reporter.
Page 21 GAO-05-536 Risk Retention Groups

In looking at other characteristics of RRGs, according to an NAIC analysis, 

the average annual failure rate for RRGs was somewhat higher than the 

average annual failure rate for all other property and casualty insurers. 

Between 1987 and 2003, the average annual failure rate for RRGs was 1.83 

percent compared with the 0.78 percent failure rate for property and 

casualty insurers.30 Over this period, NAIC determined that a total of 22 

RRGs failed, with between no and five RRGs failing each year.31 In 

comparison, NAIC determined that a total of 385 traditional insurers failed, 

with between 5 and 57 insurance companies failing each year. Although the 

difference in failure rates was statistically significant, it should be noted 

that the comparison may not be entirely parallel. NAIC compared RRGs 

that can sell only commercial liability insurance to businesses with insurers 

that can sell all lines of property and casualty (liability) for commercial and 

personal purposes.32 Moreover, because NAIC included all propertycasualty insurers, no analysis was done to adjust for size and longevity. 

30To determine the failure rate for RRGs and traditional insurance companies, NAIC 

compared the total number of “failed” insurance companies each year with the total number 

of insurance companies writing business in each year. NAIC characterized insurance 

companies as “failed” if a state regulator placed the company into rehabilitation, 

conservation, or liquidation. See appendix I for more information about NAIC’s 

methodology, and definitions of rehabilitation, conservation, and liquidation. See appendix 

IV for a list of the RRGs that have failed.

31According to NAIC data, between 1991 and 2003, 21 other RRGs voluntarily dissolved (with 

all claims paid) and 4 other RRGs combined or merged with other companies. 

32Traditional insurance companies write both property and casualty (that is, liability) 

insurance, but due to the time-intensive nature of the many tasks involved in this analysis, 

NAIC could not create a peer group of traditional companies that only wrote commercial 

liability insurance and were similar in size to RRGs. For example, in 2003 the largest 

traditional insurer wrote $32 billion in premiums, whereas the largest RRG wrote $308 

million. See appendix I for more information.
Page 22 GAO-05-536 Risk Retention Groups

Recent Market Conditions 

Have Prompted the Creation 

of Many RRGs, Especially to 

Provide Medical 

Malpractice Insurance

In creating RRGs, companies and organizations are generally responding to 

market conditions. As the availability and affordability of insurance 

decreased (creating a “hard” market), some insurance buyers sought 

alternatives to traditional insurance and turned to RRGs.33 In response, 

more RRGs formed from 2002 through 2004 than in the previous 15 years 

(1986–2001). This increase is somewhat similar in magnitude to an increase 

that occurred in 1986–1989 in response to an earlier hard market for 

insurance (see fig. 4).34 The 117 RRGs formed from January 1, 2002, through 

December 31, 2004, represent more than half of all RRGs in operation as of 

December 31, 2004. 

33During a hard market, insurance prices rise and insurers tend to narrow their coverage, 

tighten their underwriting standards, and withdraw from certain markets. Soft and hard 

market cycles in the medical malpractice market tend to be more extreme than in other 

insurance markets because of the longer time required to resolve medical malpractice 

claims and other factors, such as changes in investment income and reduced competition, 

which can exacerbate price fluctuations. See GAO, Medical Malpractice Insurance: 

Multiple Factors Have Contributed to Increased Premium Rates, GAO-03-702 (Washington, 

D.C.: June 27, 2003).

34According to NAIC, during the mid-1980s, professionals, businesses, nonprofit 

organizations, and governmental entities experienced significant increases in their liability 

insurance premiums, while finding it more difficult to obtain coverage. See NAIC, Cycles 

and Crises in Property/Casualty Insurance: Cases and Implications for Public Policy

(Kansas City, Mo.: 1991).
Page 23 GAO-05-536 Risk Retention Groups

Figure 4: Number of RRGs, by Formation Date

Note: This figure represents the number of RRGs formed during different periods, regardless of 

whether they are currently active or not, and includes only those RRGs for which NAIC has data. 

According to NAIC data, four companies either formed as RRGs or converted to RRGs after the 

passage of the Product Liability Risk Retention Act of 1981.

0

20

40

60

80

100

120

2002 -

2004

1998 -

2001

1994 -

1997

1990 -

1993

1986 -

1989

Before

1986

Formation date

Number of RRGs

21

16 19

57

117

Source: GAO analysis of NAIC data.

4
Page 24 GAO-05-536 Risk Retention Groups

More specifically, RRGs established to provide medical malpractice 

insurance accounted for most of the increase in RRG numbers in 2002–

2004.35 Healthcare providers sought insurance after some of the largest 

medical malpractice insurance providers exited the market because of 

declining profits, partly caused by market instability and high and 

unpredictable losses—factors that have contributed to the high risks of 

providing medical malpractice insurance.36 From 2002 through 2004, 

healthcare RRGs accounted for nearly three-fourths of all RRG formations. 

Further, 105 RRGs were insuring healthcare providers as of the end of 2004, 

compared with 23 in previous years (see again fig. 2). These RRGs serve a 

variety of healthcare providers. For example, during 2003, 23 RRGs formed 

to insure hospitals and their affiliates, 13 formed to insure physician 

groups, and 11 formed to insure long-term care facilities, including nursing 

homes and assisted living facilities. However, the dramatic increase in the 

overall number of RRGs providing medical malpractice insurance may 

precipitate an increase in the number of RRGs vulnerable to failure. Studies 

have characterized the medical malpractice insurance industry as volatile 

because the risks of providing medical malpractice insurance are high.37

35This observation was based on our review of formation statistics provided in the March 

2005 RRR. In 2002–2004, of the 117 newly formed RRGs, 94 were formed to provide 

healthcare coverage. 

36GAO-03-702. Medical malpractice insurance operates much like other types of insurance, 

with insurers collecting premiums from policyholders (physicians, hospitals, etc.) in 

exchange for an agreement to defend and pay future claims within the limits set by the 

policy. Medical malpractice insurance has become less profitable due to higher losses on 

medical malpractice insurance claims, rising reinsurance rates, long lags between the 

collection of premiums and the payment of claims, and other factors. 

37GAO-03-702. We concluded that the medical malpractice insurance market is more volatile 

than the property-casualty insurance market as a whole because of the length of time 

involved in resolving medical malpractice claims and the volatility of the claims themselves. 

Our analysis also showed that annual loss ratios for medical malpractice insurers tended to 

swing higher or lower than those for property-casualty insurers as a whole, reflecting more 

extreme changes in insurers’ expectations. See also NAIC, Medical Malpractice Insurance 

Report: A Study of Market Conditions and Potential Solutions to the Recent Crisis

(Kansas City, Mo.: Sept. 12, 2004). NAIC details statistical evidence supporting the long-term 

volatility of the medical malpractice market and describes several Conning and Company 

studies spanning nearly a decade that reported increasing volatility, rapid deterioration in 

the market, and rapidly deteriorating loss ratios.
Page 25 GAO-05-536 Risk Retention Groups

Finally, many of the recently formed healthcare-related RRGs are selling 

insurance in states where medical malpractice insurance rates for 

physicians have increased the most.38 For example, since April 30, 2002, the 

Pennsylvania Insurance Department has registered 32 RRGs to write 

medical malpractice products. In addition, since the beginning of 2003, the 

Texas Department of Insurance has registered 15 RRGs to write medical 

malpractice insurance, more than the state had registered in the previous 

16 years. Other states where recently formed RRGs were insuring doctors 

include Illinois and Florida, states that have also experienced large 

increases in medical malpractice insurance premium rates. 

LRRA’s Regulatory 

Preemption Has 

Resulted in Widely 

Varying Requirements 

among States and 

Limited Confidence in 

RRG Regulation

LRRA’s regulatory preemption has allowed states to set regulatory 

requirements that differ significantly from those of traditional insurers, and 

from each other, producing limited confidence among regulators in the 

regulation of RRGs. Many of the differences arise because some states 

allow RRGs to be chartered as captive insurance companies, which 

typically operate under a set of less restrictive rules than traditional 

insurers. As a result, RRGs generally domicile in those states that permit 

their formation as captive insurance companies, rather than in the states in 

which they conduct most of their business. For example, RRGs domiciled 

as captive insurers usually can start their operations with smaller amounts 

of capital and surplus than traditional insurance companies, use letters of 

credit to meet minimum capitalization requirements, or meet fewer 

reporting requirements. Regulatory requirements for captive RRGs vary 

among states as well, in part because regulation of RRGs and captives are 

not subject to uniform, baseline standards, such as the NAIC accreditation 

standards that define a state’s regulatory structure for traditional 

companies. As one notable example, states do not require RRGs to follow 

the same accounting principles when preparing their financial reports, 

making it difficult for some nondomiciliary state regulators, as well as 

NAIC analysts, to reliably assess the financial condition of RRGs. 

Regulators responding to our survey also expressed concern about the lack 

of uniform, baseline standards. Few (eight) indicated that they believed 

38GAO-03-702. We examined selected states and determined that, since 1999, medical 

malpractice insurance rates for physicians in some states increased dramatically for several 

reasons, including increased losses on insurer medical malpractice claims, decreased 

insurer investment income, the exit of some insurers from the medical malpractice market 

(either voluntarily or because of insolvency), and increases in reinsurance rates for medical 

malpractice insurers. 
Page 26 GAO-05-536 Risk Retention Groups

LRRA’s regulatory safeguards and protections, such as the right to file a suit 

against an RRG in court, were adequate. Further, some regulators 

suggested that some domiciliary states were modifying their regulatory 

requirements and practices to make it easier for RRGs to domicile in their 

state. We found some evidence to support these concerns based on 

differences among states in minimum capitalization requirements, 

willingness to charter RRGs to insure parties that sell extended service 

contracts to consumers, or willingness to charter RRGs primarily started 

by service providers, such as management companies, rather than 

insureds.

Most RRGs Have Domiciled 

in States That Charter Them 

as Captives but Have 

Conducted Most of Their 

Business in Other States

Regulatory requirements for captive insurers are generally less restrictive 

than those for traditional insurers and offer RRGs several financial 

advantages. For example, captive laws generally permit RRGs to form with 

smaller amounts of required capitalization (capital and surplus), the 

minimum amount of initial funds an insurer legally must have to be 

chartered.39 While regulators reported that their states generally require 

traditional insurance companies to have several millions of dollars in 

capital and surplus, they often reported that RRGs chartered as captives 

require no more than $500,000.40 In addition, unlike requirements for 

traditional insurance companies, the captive laws of the six leading 

domiciliary states permit RRGs to meet and maintain their minimum 

capital and surplus requirements in the form of an irrevocable letter of 

credit (LOC) rather than cash.41 According to several regulators that 

charter RRGs as captives, LOCs may provide greater protection to the 

39Regulators identified their state’s minimum statutory capital and surplus requirements for 

their traditional and captive insurers in response to our survey.

40However, according to the leading domiciliary state regulators, regardless of the statutory 

minimum requirement, they determine an RRG’s actual operating capital and surplus needs 

based on an assessment of the RRG’s proposed business plan and the amount of 

capitalization necessary to avoid financial difficulties. Also, the statutory minimum for 

capitalizing new RRGs still may be higher than those for pure captives. For example, for 

pure captives, Nevada requires $200,000 and Vermont $250,000, but for RRGs, Nevada 

requires $500,000 and Vermont $1 million. 

41For an RRG, an LOC is a document issued by a financial institution on behalf of a 

beneficiary (for example, the insurance commissioner) stating the amount of credit the 

customer has available, and that the institution will honor drafts up to the amount written 

by the customer. An irrevocable LOC could not be canceled or amended without the 

beneficiary’s approval. NAIC reviewed the financial statements of 49 RRGs that commenced 

business in 2003 and identified 13 that were capitalized with LOCs.
Page 27 GAO-05-536 Risk Retention Groups

insureds than cash when only the insurance commissioner can access 

these funds. The insurance commissioner, who would be identified as the 

beneficiary of the LOC, could present the LOC to the bank and immediately 

access the cash, but a representative of the RRG could not. However, other 

state regulators questioned the value of LOCs because they believed cash 

would be more secure if an RRG were to experience major financial 

difficulties. One regulator noted that it becomes the regulator’s 

responsibility, on a regular basis, to determine if the RRG is complying with 

the terms of the LOC. In addition, in response to our survey, most 

regulators from states that would charter RRGs as captives reported that 

RRGs would not be required to comply with NAIC’s risk-based capital 

(RBC) requirements.42 NAIC applies RBC standards to measure the 

adequacy of an insurer’s capital relative to their risks. Further, RRGs 

chartered as captives may not be required to comply with the same NAIC 

financial reporting requirements, such as filing quarterly and annual 

reports with NAIC, that regulators expect traditional insurance companies 

to meet.43 For example, while the statutes of all the leading domiciliary 

states require RRGs chartered as captives to file financial reports annually 

with their insurance departments, as of July 2004, when we conducted our 

survey, the statutes of only half the leading domiciliary states—Hawaii,

42Almost all regulators responded that RRGs chartered as traditional companies would have 

to comply with NAIC’s RBC requirements, but only 7 of 19 regulators responded that RRGs 

chartered as captives would have to comply with these requirements. See appendix II for 

more information about the survey question and appendix III for more information about 

RBC requirements.

43LRRA only requires that each RRG submit to the insurance commissioner of each state in 

which it is doing business a copy of its annual financial statement. 15 U.S.C. § 3902(d)(1)(3). 

In response to our survey, 14 of 18 regulators indicated that the laws and regulations of their 

state would require RRGs domiciled in their state to submit the same financial information 

as traditional insurers to NAIC, but additional discussions with regulators from the six 

leading domiciliary states suggested that some regulators may have based their responses 

on their department’s practices, rather than the statutes of their state. Arkansas, Montana, 

Rhode Island, and Utah were the four states that reported that RRGs would not have to 

submit the same financial information to NAIC as traditional insurers. See the next section 

for more information on NAIC’s accreditation standards and appendix II for more 

information about the survey question.
Page 28 GAO-05-536 Risk Retention Groups

South Carolina, and Vermont—explicitly require that these reports also be 

provided to NAIC on an annual basis.44

In addition, when RRGs are chartered as captive insurance companies they 

may not have to comply with the chartering state’s statutes regulating 

insurance holding company systems. All 50 states and the District of 

Columbia substantially have adopted such statutes, based on NAIC’s Model 

Insurance Holding Company System Regulatory Act.45 

As in the model act, a state’s insurance holding company statute generally 

requires insurance companies that are part of holding company systems 

and doing business in the state to register with the state and annually 

disclose to the state insurance regulator all the members of that system. 

Additionally, the act requires that transactions among members of a 

holding company system be on fair and reasonable terms, and that 

insurance commissioners be notified of and given the opportunity to 

review certain proposed transactions, including reinsurance agreements, 

management agreements, and service contracts. For 2004, NAIC reviewed 

RRG annual reports and identified 19 RRGs that reported themselves as 

being affiliated with other companies (for example, their management and 

reinsurance companies). However, since only two of the six leading 

domiciliary states, Hawaii, and to some extent South Carolina, actually 

require RRGs to comply with this act, we do not know whether more RRGs

44The District of Columbia has since amended its Risk Retention Act of 1993 (D.C. Law 10-

46, D.C. Code §§ 31-4101 et seq.) to require RRGs chartered as captives to file an annual 

statement with NAIC, on a form prescribed by NAIC. Since its enactment in 1993, the 

District of Columbia Risk Retention Act has required all RRGs chartered in the District to 

file a copy of their annual statements with NAIC. According to the District regulator, RRGs 

chartered as captives were not subject to this requirement prior to the 2004 amendments to 

the act. 

45NAIC Model Insurance Holding Company System Regulatory Act (2001). The NAIC model 

act defines an “insurance holding company system” as consisting of two or more affiliated 

entities, one or more of which is an insurer. An “affiliate” of an insurer is defined as a person 

that directly or indirectly controls, is controlled by, or is under common control with the 

insurer. “Control” over a person is defined as the power to direct management and policies 

of that person and is presumed to exist if one can vote 10 percent or more of the voting 

securities of the other person. Some states specifically exempt RRGs from the requirements 

of their insurance holding company act, and some states give their insurance commissioners 

discretionary authority to exempt RRGs from the requirements of the act. 
Page 29 GAO-05-536 Risk Retention Groups

could be affiliated with other companies.46 The Hawaii regulator said that 

RRGs should abide by the act’s disclosure requirements so that regulators 

can identify potential conflicts of interests with service providers, such as 

managers or insurance brokers. Unless an RRG is required to make these 

disclosures, the regulator would have the added burden of identifying and 

evaluating the nature of an RRG’s affiliations. He added that such 

disclosures are important because the individual insureds of an RRG, in 

contrast to the single owner of a pure captive, may not have the ability to 

control potential conflicts of interest between the insurer and its affiliates. 

(See the next section of this report for examples of how affiliates of an 

RRG can have conflicts of interest with the RRG.)

Because of these regulatory advantages, RRGs are more likely to domicile 

in states that will charter them as captives than in the states where they sell 

insurance. Figure 5 shows that 18 states could charter RRGs as captives. 

The figure also shows that most RRGs have chosen to domicile in six 

states—Arizona, the District of Columbia, Hawaii, Nevada, South Carolina, 

and Vermont—all of which charter RRGs as captives and market 

themselves as captive domiciles.47 Of these states, Vermont and Hawaii 

have been chartering RRG as captives for many years, but Arizona, the 

District of Columbia, Nevada, South Carolina, and five additional states 

have adopted their captive laws since 1999.48 In contrast to an RRG 

46According to NAIC, the annual statement instructions indicate that companies must 

identify on the appropriate schedule (that is, Schedule Y) whether they are part of a holding 

company if the “reporting company is required to file a registration statement under the 

provisions of the domiciliary state's Insurance Holding Company System Regulatory Act.” 

Thus, if the RRG is not subject to the act, it would not be required to complete Schedule Y, 

Part I. South Carolina regulators reported that RRGs now are subject to the Insurance 

Holding Company System Regulatory Act as a result of changes made to their statute in 

2004.

47The six leading domiciliary states had chartered 88 percent of all RRGs operating as of 

December 31, 2004. This percentage is an estimate based on data NAIC reported to us in 

February 2005. NAIC’s database may have excluded RRGs that had been chartered but had 

not yet filed with NAIC. For example, the State of Nebraska reported that it had chartered 

an RRG in 2002 but this RRG did not appear on NAIC’s list of RRGs. In addition, the 

database included several RRGs that were no longer active as RRGs or were mislabeled as 

RRGs.

48In response to our survey, 18 states reported that they had captive laws under which RRGs 

could be chartered. Of these, nine reported that they adopted their captive laws between the 

beginning of 1999 and mid-2004. In addition, according to NAIC data, Vermont chartered its 

first RRG in 1987, and Hawaii chartered its first RRG in 1988.
Page 30 GAO-05-536 Risk Retention Groups

chartered as a captive, a true captive insurer generally does not directly 

conduct insurance transactions outside of its domiciliary state.

Figure 5: Number of RRGs, by Captive or Noncaptive Charter and State of Domicile, as of the End of 2004 

Note: States, with the exception of Maryland, provided us information about their captive laws as part 

of our survey. We did not independently verify the information provided or whether RRGs domiciled in 

the state were chartered as captives, although we updated some of the survey results to reflect states 

that have adopted captive statutes since the time of our survey. In addition, (1) the State of Maine 

indicated that while it had a captive law, the question of whether or not an RRG could form under it had 

not been formally considered and (2) the State of Kansas indicated that while it could charter RRGs as 

captives, its captive law does not explicitly permit RRGs to be chartered as captives.

Sources: GAO and NAIC.

State

Date captive

insurance

law enacted

10

2

0

Del.

1

1

0

18

2

39

D.C.

15

0 4

11

1

R.I.

0

1

0

Vt.

67

0

1

4

1

2

1

1

States with captive insurance laws that will charter RRGs as captives

States with captive insurance laws that will not charter RRGs as captives

States without captive insurance laws that have active chartered RRGs

States without captive insurance laws that have no active chartered RRGs

Number of active RRGs

Ala. ------ 1

Colo.

D.C.

Del.

Fla.

Ga.

Hawaii

Iowa

Ill.

Ind.

Kans.

Ky.

Maine

Mo.

Mont.

Nev.

N.Y.

Okla.

R.I.

S.C.

1963

2000

1984

1982

1989

1986

------

------

1988

2000

1997

------

2001

1999

1997

2004

1988

2000

2

15

1

1

1

18

2

1

4

0

2

0

1

4

11

0

0

0

39

Ariz. 2001 10

Ark. 2001 0

S.Dak. 1996 0

Tenn.

Tex.

Utah

Va.

Vt.

W.Va.

1978

------

2003

1980

1981

1987

1

1

0

0

67

0

182

0

Illinois did not identify the date its captive law was enacted.
Page 31 GAO-05-536 Risk Retention Groups

However, states of domicile are rarely the states in which RRGs sell much, 

or any, insurance. According to NAIC, 73 of the 115 RRGs active in 2003 did 

not write any business in their state of domicile, and only 10 wrote more 

than 30 percent of their business in their state of domicile.49 The states in 

which RRGs wrote most of their business in 2003—Pennsylvania ($238 

million), New York ($206 million), California ($156 million), Massachusetts 

($98 million)—did not charter any RRGs. Texas, which chartered only one 

RRG, had $87 million in direct written premiums written by RRGs. For 

more information on the number of RRGs chartered by state and the 

amount of direct premiums written by RRGs, see figure 6.

49“Business” refers to direct written premiums. Direct written premiums equals the total 

amount of premiums an insurer writes annually on all policies without adjustments for 

ceding or assuming any portion of these premiums to a reinsurance company.
Page 32 GAO-05-536 Risk Retention Groups

Figure 6: Number of RRGs Chartered, by State, as of the End of 2004, and Amount of Direct Premiums Written by RRGs, by 

State, 2003 

Note: The numbers displayed on some states in the map represent the number of RRGs domiciled in 

the state. For 2003, RRGs also wrote business in places such as Puerto Rico, Guam, and Canada 

(less than $17 million). 

Sources: GAO and NAIC.

$40 million to $100 million

Less than $10 million

$10 million to $19.9 million

$20 million to $39 million

8

19

11

10

32%

$156 million to $238 million 3 35%

RRGs did not write premiums within 

the $98 million to $155 million range.

6%

9%

18%

2003 direct premiums written

Total

number

of states

in this

category

Total percentage

of 2003 direct premiums

written in this category

1

10

2 D.C.: 15

1

Del.: 1

1

18

2

4

1

2 1

4

11

39

1

1

67
Page 33 GAO-05-536 Risk Retention Groups

Inconsistent Regulation of 

RRGs Resembles Earlier 

Regulation of Traditional 

Insurers, Which Suffered 

from Lack of Uniform, 

Baseline Standards 

The current regulatory environment for RRGs, characterized by the lack of 

uniform, baseline standards, offers parallels to the earlier solvency 

regulation of multistate traditional insurers. Uniformity in solvency 

regulation for multistate insurers is important, provided the regulation 

embodies best practices and procedures, because it strengthens the 

regulatory system across all states and builds trust among regulators. After 

many insurance companies became insolvent during the 1980s, NAIC and 

the states recognized the need for uniform, baseline standards, particularly 

for multistate insurers.50 To alleviate this situation, NAIC developed its 

Financial Regulation Standards and Accreditation Program (accreditation 

standards) in 1989 and began the voluntary accreditation of most state 

regulators in the 1990s. Prior to accreditation, states did not uniformly 

regulate the financial solvency of traditional insurers, and many states 

lacked confidence in the regulatory standards of other states. By becoming 

accredited, state regulators demonstrated that they were willing to abide 

by a common set of solvency standards and practices for the oversight of 

the multistate insurers chartered by their state. As a result, states currently 

generally defer to an insurance company’s domiciliary state regulator, even 

though each state retains the authority, through its licensing process, to 

regulate all traditional insurance companies selling in the state. 

50See also GAO, Insurance Regulation Assessment of the National Association of the 

Insurance Commissioners, GAO/T-GGD 91-37 (Washington, D.C.: May 22, 1991). We 

assessed the capability of NAIC to create and maintain an effective national system for 

solvency regulation. As part of this assessment, we observed that states varied widely in the 

quality of their solvency regulation, and states did not have consistent solvency laws and 

regulation. 
Page 34 GAO-05-536 Risk Retention Groups

NAIC’s accreditation standards define baseline requirements that states 

must meet for the regulation of traditional companies in three major areas: 

First, they include minimum standards for the set of laws and regulations 

necessary for effective solvency regulation.51 Second, they set minimum 

standards for practices and procedures, such as examinations and financial 

analysis, which regulators routinely should do.52 Third, they establish 

expectations for resource levels and personnel practices, including the 

amount of education and experience required of professional staff, within 

an insurance department.53 However, NAIC does not have a similar set of 

regulatory standards for regulation of RRGs, which also are multistate 

insurers. 

According to NAIC officials, when the accreditation standards originally 

were developed, relatively few states were domiciling RRGs as captive 

insurers, and the question of standards for the regulation of captives and 

RRGs did not materialize until NAIC began its accreditation review of 

Vermont in 1993. NAIC completely exempted the regulation of captive 

insurers from the review process but included RRGs because, unlike pure 

captives, RRGs have many policyholders and write business in multiple 

states. NAIC’s accreditation review of Vermont lasted about 2 years and 

NAIC and Vermont negotiated an agreement that only part of the 

accreditation standards applied to RRGs.54 As a result of the review, NAIC 

determined that RRGs were sufficiently different from traditional insurers 

so that the regulatory standards defining the laws and regulations

51These accreditation standards also are known as Part A. To meet the requirements of Part 

A, state legislatures must adopt all of NAIC’s 18 model laws and regulations (or versions that 

are substantially similar) and have authorized the state insurance regulators to implement 

appropriate regulations.

52Also known as Part B, these accreditation standards cover the three areas considered 

necessary for effective solvency regulation—financial analysis, financial examinations, and 

communication with states—and procedures for troubled companies. 

53Also known as Part C, the purpose of these accreditation standards is to ensure that state 

insurance departments have appropriate organizational and personnel practices that 

encourage professional development, establish minimum educational and experience 

requirements, and allow the departments to attract and retain qualified personnel. 

54Accreditation reviews of states vary in length; for example, they could last a few weeks.
Page 35 GAO-05-536 Risk Retention Groups

necessary for effective solvency regulation should not apply to RRGs.55

However, NAIC and Vermont did not develop substitute standards to 

replace those they deemed inappropriate. Subsequently, other states 

domiciling RRGs as captives also have been exempt from enforcing the 

uniform set of laws and regulations deemed necessary for effective 

solvency regulation under NAIC’s accreditation standards. As a result, 

some states chartering RRGs as captives do not obligate them, for example, 

to adopt a common set of financial reporting procedures and practices, 

abide by NAIC’s requirements for risk-based capital, or comply with 

requirements outlined in that state’s version of NAIC’s Model Insurance 

Holding Company System Regulatory Act.56

In contrast, while NAIC’s standards for the qualifications of an insurance 

department’s personnel apply to RRGs, they do not distinguish between the 

expertise needed to oversee RRGs and traditional insurance companies. 

Because half of the 18 states that are willing to charter RRGs as captives 

have adopted captive laws since 1999, few domiciliary state insurance 

departments have much experience regulating RRGs as captive insurance 

companies. Further, in response to our 2004 survey, only three states new 

to chartering captives—Arizona, the District of Columbia, and South 

Carolina—reported that they have dedicated certain staff to the oversight 

of captives.57 However, the State of Nevada later reported to us that it 

dedicated staff to the oversight of captives as of June 2005. 

The importance of standards that address regulator education and 

experience can be illustrated by decisions made by state insurance 

departments or staff relatively new to chartering RRGs. In 1988, Vermont 

chartered Beverage Retailers Insurance Co. Risk Retention Group 

(BRICO). Launched and capitalized by an outside entity, BRICO did not 

55RRGs chartered as captive insurers are exempt from Part A requirements but Vermont and 

NAIC agreed that the Part B standards regarding practices and procedures, including 

financial examinations and analysis, should apply to the regulation of RRGs. However, a 

state’s examinations of an RRG would be based on its own laws and regulations rather than 

the laws and regulations required by the accreditation standards. 

56For example, according to NAIC’s Part A accreditation standards, state statutes, 

regulations, or practices should require companies to file their annual and quarterly 

financial statements with NAIC using procedures and practices prescribed by the NAIC 

Accounting Practices and Procedures Manual (for example, use of statutory accounting 

principles). 

57Hawaii and Vermont also reported that they have staff specifically dedicated to the 

oversight of captives.
Page 36 GAO-05-536 Risk Retention Groups

have a sufficient number of members as evidenced by the need for an 

outside entity to provide the capital. It failed in 1995 in large part because it 

wrote far less business than originally projected and suffered from poor 

underwriting. Further, according to regulators, BRICO began to write 

business just as the market for its product softened, and traditional 

licensed insurers began to compete for the business. As a result, the 

Vermont regulators said that Vermont would not charter RRGs unless they 

had a sufficient number of insureds at start-up to capitalize the RRG and 

make its future operations sustainable. More recently, in 2000, shortly after 

it adopted its captive statutes, South Carolina chartered Commercial 

Truckers Risk Retention Group Captive Insurance Company. This RRG, 

which also largely lacked members at inception, failed within a year 

because it had an inexperienced management team, poor underwriting, and 

difficulties with its reinsurance company. The regulators later classified 

their experience with chartering this RRG, particularly the fact that the 

RRG lacked a management company, as “lessons learned” for their 

department. Finally, as reported in 2004, the Arizona insurance department 

inadvertently chartered an RRG that permitted only the brokerage firm that 

formed and financed the RRG to have any ability to control the RRG 

through voting rights. The Arizona insurance department explained that 

they approved the RRG’s charter when the insurance department was 

operating under an acting administrator and that the department would 

make every effort to prevent similar mistakes.

According to NAIC officials, RRGs writing insurance in multiple states, like 

traditional insurers, would benefit from the adoption of uniform, baseline 

standards for state regulation, and they plan gradually to develop them. 

NAIC representatives noted that questions about the application of 

accreditation standards related to RRGs undoubtedly would be raised 

again because several states new to domiciling RRGs will be subject to 

accreditation reviews in the next few years.58 However, the representatives 

also noted, that because the NAIC accreditation team can review the 

oversight of only a few of the many insurance companies chartered by a 

state, the team might not select an RRG. 

58NAIC officials provided us examples of states that would be accredited over the next few 

years, but they also noted that NAIC generally does not publish this information. 
Page 37 GAO-05-536 Risk Retention Groups

Variations in RRG Reporting 

Requirements Have 

Impeded Assessments of 

Their Financial Condition

As discussed previously, states domiciling RRGs as captives are not 

obligated to require that RRGs meet a common set of financial reporting 

procedures and practices. Moreover, even among states that charter RRGs 

as captives, the financial reporting requirements for RRGs vary. Yet, the 

only requirement under LRRA for the provision of financial information to 

nondomiciliary regulators is that RRGs provide annual financial statements 

to each state in which they operate. Further, since most RRGs sell the 

majority of their insurance outside their state of domicile, insurance 

commissioners from nondomiciliary states may have only an RRG’s 

financial reports to determine if an examination may be necessary.59 As we 

have reported in the past, to be of use to regulators, financial reports 

should be prepared under consistent accounting and reporting rules and 

provided in a timely manner that results in a fair presentation of the 

insurer’s true financial condition.60

One important variation in reporting requirements is the use by RRGs of 

accounting principles that differ from those used by traditional insurance 

companies. The statutes of the District of Columbia, Nevada, South 

Carolina, and Vermont require their RRGs to use GAAP; Hawaii requires 

RRGs to use statutory accounting principles (SAP); and Arizona permits 

RRGs to use either.61 The differences in the two sets of accounting 

principles reflect the different purposes for which each was developed and 

each produces a different—and not necessarily comparable—financial 

picture of a business. In general, SAP is designed to meet the needs of 

insurance regulators, the primary users of insurance financial statements, 

and stresses the measurement of an insurer’s ability to pay claims (remain 

solvent) in order to protect insureds. In contrast, GAAP provides guidance 

that businesses follow in preparing their general purpose financial 

statements, which provide users such as investors and creditors with 

useful information that allows them to assess a business’ ongoing financial 

performance. However, inconsistent use of accounting methodologies by 

59LRRA permits nondomiciliary states to conduct an examination to determine an RRG’s 

financial condition if the insurance commissioner of the state of domicile has not begun or 

has refused to begin an examination of the RRG. 15 U.S.C. § 3902(a)(1)(E).

60GAO/T-GGD-91-37. 

61According to NAIC, 79 of the 115 RRGs active as of the end of 2003 filed financial 

statements using GAAP while the others filed using SAP. The RRGs that filed their 

statements using SAP also were domiciled in states besides Hawaii, such as Colorado, 

Florida, and Indiana. 
Page 38 GAO-05-536 Risk Retention Groups

RRGs could affect the ability of nondomiciliary regulators to determine the 

financial condition of RRGs, especially since regulators are used to 

assessing traditional insurers that must file reports using SAP.62

In addition, the statutes of each of the six domiciliary states allow RRGs, 

like other captive insurers, to modify whichever accounting principles they 

use by permitting the use of letters of credit (LOC) to meet statutory 

minimum capitalization requirements. Strictly speaking, neither GAAP nor 

SAP would permit a company to count an undrawn LOC as an asset 

because it is only a promise of future payment—the money is neither 

readily available to meet policyholder obligations nor is it directly in the 

possession of the company. In addition to allowing LOCs, according to a 

review of financial statements by NAIC, the leading domiciliary states that 

require RRGs to file financial statements using GAAP also allow RRGs to 

modify GAAP by permitting them to recognize surplus notes under capital 

and surplus. This practice is not ordinarily permitted by GAAP. A company 

filing under GAAP would recognize a corresponding liability for the surplus 

note and would not simply add it to the company’s capital and surplus.63

See appendix III for more specific information on the differences between 

SAP and GAAP, including permitted modifications, and how these 

differences could affect assessments of a company’s actual or risk-based 

capital.

Variations in the use of accounting methods have consequences for 

nondomiciliary regulators who analyze financial reports submitted by 

RRGs and illustrate some of the regulatory challenges created by the 

absence of uniform standards. Most nondomiciliary states responding to 

our survey of all state regulators indicated that they performed only a 

limited review of RRG financial statements.64 To obtain more specific 

information about the impact of these differences, we contacted the six 

62According to NAIC, some states require a reconciliation of GAAP to SAP in the “note” 

sections of their financial statements.

63A surplus note is debt that an insurance company owes and that the lender has agreed 

cannot be repaid without regulatory approval. See appendix III for more information.

64In response to our survey, 22 state regulators indicated they gave RRG financial statements 

less review than they gave for eligible nonadmitted insurers (companies not licensed by a 

particular state to sell and service insurance policies within that state). In contrast, 21 other 

regulators indicated they provided RRGs the same level of review, and 5 indicated they 

provided more review. Our evaluation of the 33 regulators who provided written comments 

showed that many state reviews were limited. 
Page 39 GAO-05-536 Risk Retention Groups

states—Pennsylvania, California, New York, Massachusetts, Texas, and 

Illinois—where RRGs collectively wrote almost half of their business in 

2003 (see fig. 6). Regulators in Massachusetts and Pennsylvania reported 

that they did not analyze the financial reports and thus had no opinion 

about the impact of the accounting differences, but three of the other four 

states indicated that the differences resulted in additional work. Regulators 

from California and Texas told us that the use of GAAP, especially when 

modified, caused difficulties because insurance regulators were more 

familiar with SAP, which they also believed better addressed solvency 

concerns than GAAP. The regulator from Illinois noted that RRG annual 

statements were not marked as being filed based on GAAP and, when staff 

conducted their financial analyses, they took the time to disregard assets 

that would not qualify as such under SAP. The Texas regulator reported 

that, while concerned about the impact of the differences, his department 

did not have the staffing capability to convert the numbers for each RRG to 

SAP and, as a result, had to prioritize their efforts. 

Further, NAIC staff reported that the use by RRGs of a modified version of 

GAAP or SAP distorted the analyses they provided to state regulators. One 

of NAIC’s roles is to help states identify potentially troubled insurers 

operating in their state by analyzing insurer financial reports with 

computerized tools to identify statistical outliers or other unusual data. In 

the past, we have noted that NAIC’s solvency analysis is an important 

supplement to the overall solvency monitoring performed by states and can 

help states focus their examination resources on potentially troubled 

companies.65 NAIC uses Financial Analysis Solvency Tools (FAST), such as 

the ratios produced by the Insurance Regulatory Information System (IRIS) 

and the Insurer Profile Reports, to achieve these objectives and makes the 

results available to all regulators through a central database.66 However, 

NAIC analysts reported that differing accounting formats undermined the 

relative usefulness of these tools because the tools were only designed to 

analyze data extracted from financial reports based on SAP. Similarly, when 

65GAO, Insurance Regulation: The NAIC Accreditation Program Can be Improved, GAO01-948 (Washington, D.C.: Aug. 31, 2001).

66According to NAIC, it stores IRIS ratios and Insurer Profile Reports, and 10 years of annual 

and quarterly financial data for more than 4,800 individual insurers in its Financial Data 

Repository database. Nearly all insurers, except for the smallest ones, submit their annual 

and quarterly reports to NAIC and their domiciliary regulator. NAIC flags IRIS ratios that are 

outside the “usual range” for additional regulatory attention. In response to an increased 

focus on RRGs, NAIC recently made an adjustment to the Insurer Profile Reports to notify 

the user if any RRG might have filed using GAAP. 
Page 40 GAO-05-536 Risk Retention Groups

we attempted to analyze some aspects of the financial condition of RRGs to 

compare them with traditional companies, we found that information 

produced under differing accounting principles diminished the usefulness 

of the comparison (see app. III). 

Lack of Uniform, Baseline 

Regulatory Standards Has 

Concerned Many Regulators

The lack of uniform, baseline regulatory standards for the oversight of 

RRGs contributed to the concerns of many state regulators, who did not 

believe the regulatory safeguards and protections built into LRRA (such as 

requiring RRGs to file annual financial statements with regulators and 

allowing regulators to file suit if they believe the RRG is financially 

unsound) were adequate.67 Only 8 of 42 regulators who responded to our 

survey question about LRRA’s regulatory protections indicated that they 

thought the protections were adequate (see fig. 7).68 Eleven of the 28 

regulators who believed that the protections were inadequate or very 

inadequate focused on the lack of uniform, regulatory standards or the 

need for RRGs to meet certain minimum standards—particularly for 

minimum capital and surplus levels. In addition, 9 of the 28 regulators, 

especially those from California and New York, commented that they 

believed state regulators needed additional regulatory authority to 

supervise the RRGs in their states. While RRGs, like traditional insurers, 

can sell in any or all states, only the domiciliary regulator has any 

significant regulatory oversight. 

67As noted previously, LRRA requires that RRGs file an initial plan of operation or feasibility 

study in every state in which it is planning to sell insurance and an annual financial 

statement with every state in which it is selling insurance. In addition, each nondomiciliary 

state has the right to (1) request that a domiciliary state examine an RRG, (2) examine the 

RRG itself if the domiciliary state refuses to do so, and (3) file a suit in a court of “competent 

jurisdiction” if the state believes that the RRG is in hazardous financial condition. 

68The states were Delaware, Hawaii, Kansas, Nevada, Ohio, South Dakota, Vermont, and the 

District of Columbia. 
Page 41 GAO-05-536 Risk Retention Groups

Figure 7: State Regulators’ Opinion of the Adequacy of the Regulatory Protections 

or Safeguards Built into LRRA 

Note: In addition, seven regulators responded that they had no opinion on this question, and one 

regulator did not respond at all.

In addition, the regulators from the six leading domiciliary states—Arizona, 

the District of Columbia, Hawaii, Nevada, South Carolina, and Vermont—

did not agree on the adequacy of LRRA safeguards. For example, while the 

regulators from the District of Columbia, Hawaii, Nevada, and Vermont 

thought the protections adequate, the regulator from South Carolina 

reported that LRRA’s safeguards were “neither adequate nor inadequate” 

because LRRA delegates the responsibility of establishing safeguards to 

domiciliary states, which can be either stringent or flexible in establishing 

safeguards. The other leading domiciliary state—Arizona—had not yet 

formed an opinion on the adequacy of LRRA’s provisions. The regulator 

from Hawaii also noted that the effectiveness of the LRRA provisions was 

dependent upon the expertise and resources of the RRG’s domiciliary 

regulator. 

0

5

10

15

20

Very inadequate

Inadequate

Neither adequate

nor inadequate

Adequate

Very adequate

9

19

6

8

0

Number of responses

Source: GAO.
Page 42 GAO-05-536 Risk Retention Groups

While many regulators did not believe LRRA’s safeguards were adequate, 

few indicated that they had availed themselves of the tools LRRA does 

provide nondomiciliary state regulators. These tools include the ability to 

request that a domiciliary state undertake a financial examination and the 

right to petition a court of “competent jurisdiction” for an injunction 

against an RRG believed to be in a hazardous financial condition. Recent 

cases involving state regulation of RRGs typically have centered on 

challenges to nondomiciliary state statutes that affect operations of the 

RRGs, rather than actions by nondomiciliary states challenging the 

financial condition of RRGs selling insurance in their states.69 Finally, in 

response to another survey question, nearly half of the regulators said they 

had concerns that led them to contact domiciliary state regulators during 

the 24 months preceding our survey, but only five nondomiciliary states 

indicated that they had ever asked domiciliary states to conduct a financial 

examination.70

However, according to the survey, many state regulators availed 

themselves of the other regulatory safeguards that LRRA provides—that 

RRGs submit to nondomiciliary states feasibility or operational plans 

before they begin operations in those states and thereafter a copy of the 

same annual financial statements that the RRG submits to its domiciliary 

state.71 Almost all the state regulators indicated that they reviewed these 

documents to some extent, although almost half of the state regulators 

indicated that they provided these reports less review than those submitted

69Many court cases have involved state financial responsibility statutes that have the effect 

of precluding RRGs from offering insurance to certain licensed professionals in a particular 

state, as well as the authority of a state to impose minimum capital and surplus requirement 

and regulatory fees on RRGs that are chartered in other states. See, e.g., National Warranty 

Insurance Co. RRG v. Greenfield, 214 F.3d 1073 (9th Cir. 2000), cert. den., 531 U.S. 1104 

(2001); Ophthalmic Mutual Ins. Co. v. Musser, 143 F.3d 1062 (7th Cir. 1998); Mears 

Transportation Group v. Florida, 34 F.3d 1013 (11th Cir. 1994); National Home Ins. Co. v. 

King, 291 F. Supp.2d. 518 (E.D. Ky. 2003); Attorneys’ Liability Assur. Society v. Fitzgerald, 

174 F. Supp.2d 619 (W.D. Mich. 2001); National Risk Retention Assoc. v. Brown, 927 F. 

Supp. 195 (1996), aff’d, 114 F.3d 1183 (5th Cir. 1997); and Charter Risk Retention Group v. 

Rolka et al., 796 F. Supp. 154 (M.D. Pa. 1992).

70These states were Arizona, California, Mississippi, New Mexico, and Texas. 

7115 U.S.C. § 3902(d)(2). In addition, LRRA requires RRGs to submit a copy of the group’s 

annual financial statement, certified by an independent public accountant and containing a 

statement of opinion on loss and loss adjustment expense reserves made by a member of 

the American Academy of Actuaries, or a qualified loss reserve specialist. 15 U.S.C. § 

3902(d)(3).
Page 43 GAO-05-536 Risk Retention Groups

by other nonadmitted insurers.72 In addition, nine states indicated that 

RRGs began to conduct business in their states before supplying them with 

copies of their plans of operations or feasibility studies, but most indicated 

that these occurrences were occasional. Similarly, 15 states identified 

RRGs that failed to provide required financial statements for review, but 

most of these regulators indicated that the failure to file was an infrequent 

occurrence.73

Some Evidence Suggests 

That States Have Set Their 

Captive Regulatory 

Standards to Attract RRGs 

to Domicile in Their States

Some regulators, including those from New York, California, and Texas—

states where RRGs collectively wrote about 26 percent of all their business 

but did not domicile—expressed concerns that domiciliary states were 

lowering their regulatory standards to attract RRGs to domicile in their 

states for economic development purposes. They sometimes referred to 

these practices as the “regulatory race to the bottom.” RRGs, like other 

captives, can generate revenue for a domiciliary state’s economy when the 

state taxes RRG insurance premiums or the RRG industry generates jobs in 

the local economy. The question of whether domiciliary states were 

competing with one another essentially was moot until about 1999, when 

more states began adopting captive laws. Until then, Vermont and Hawaii 

were two of only a few states that were actively chartering RRGs and 

through 1998 had chartered about 55 percent of all RRGs. However,

72States call insurers that they have not licensed—but which may be licensed in other 

states—“nonadmitted” insurers or carriers. States have the ability to prohibit unlicensed 

insurers from selling in their state. However, some states permit nonadmitted insurers to 

sell coverage that is unavailable from licensed insurers within their borders. This kind of 

coverage is also known as “surplus lines insurance.” Historically, policyholders bought 

surplus lines insurance when the insurance coverage they were seeking was unavailable 

from admitted insurers. See appendix II for more information about how states responded 

to these questions. 

73In addition, for 2003, 10 regulators identified RRGs that had not registered to conduct 

business in their states, although the RRGs reported to NAIC that they had written 

premiums in these states. Most of the 10 state regulators identified just a few RRGs as 

having failed to register and often the states referred to the same RRGs. In addition, while 

listed as RRGs in the NAIC database, as of 2003 two of the insurance companies no longer 

wrote insurance as RRGs. 
Page 44 GAO-05-536 Risk Retention Groups

between the beginning of 1999 and the end of 2004, they had chartered only 

36 percent of all newly chartered RRGs.74

The six leading domiciliary states actively market their competitive 

advantages on Web sites, at trade conferences, and through relationships 

established with trade groups. They advertise the advantages of their new 

or revised captive laws and most describe the laws as “favorable”; for 

example, by allowing captives to use letters of credit to meet their 

minimum capitalization requirements. Most of these states also describe 

their corporate premium tax structure as competitive and may describe 

their staff as experienced with or committed to captive regulation. Vermont 

emphasizes that it is the third-largest captive insurance domicile in the 

world and the number one in the United States, with an insurance 

department that has more than 20 years of experience in regulating RRGs. 

South Carolina, which passed its captive legislation in 2000, emphasizes a 

favorable premium tax structure and the support of its governor and 

director of insurance for its establishment as a domicile for captives. 

Arizona describes its state as “business friendly,” highlighting the lack of 

premium taxes on captive insurers and the “unsurpassed” natural beauty of 

the state.

However, in addition to general marketing, some evidence exists to support 

the concern that the leading domiciliary states are modifying policies and 

procedures to attract RRGs. We identified the following notable differences 

among the states, some of which reflect the regulatory practices and 

approaches of each state and others, statute: 

74These percentages are estimates based on data that NAIC provided. Not all RRGs, such as 

those domiciled in Bermuda and the Cayman Islands, or even in the United States, report 

their chartering information to NAIC. In addition, we found two insurance companies that 

were mislabeled as RRGs. 
Page 45 GAO-05-536 Risk Retention Groups

• Willingness to domicile vehicle service contract (VSC) providers: 

Several states, including California, New York, and Washington, 

questioned whether RRGs consisting of VSC providers should even 

qualify as RRGs and are concerned about states that allow these 

providers to form RRGs. VSC providers issue extended service contracts 

for the costs of future repairs to consumers (that is, the general public) 

who purchase automobiles. Until 2001, almost all of these RRGs were 

domiciled in Hawaii but after that date, all the new RRGs formed by VSC 

providers have domiciled in the District of Columbia and South 

Carolina.75 The Hawaii regulator said that the tougher regulations it 

imposed in 2001 (requiring that RRGs insuring VSC providers annually 

provide acceptable proof that they were financially capable of meeting 

VSC claims filed by consumers) dissuaded these providers from 

domiciling any longer in Hawaii. In addition, one of the leading 

domiciliary states, Vermont, refuses to domicile any of these RRGs 

because of the potential risk to consumers. Consumers who purchase 

these contracts, not just the RRG insureds, can be left without coverage 

if the RRG insuring the VSC provider’s ability to cover VSC claims fails. 

(We discuss RRGs insuring service contract providers and 

consequences to insureds and consumers more fully later in this report.)

• Statutory minimum capitalization requirements: Differences in the 

minimum amount of capital and surplus (capitalization) each insurer 

must have before starting operations make it easier for smaller RRGs to 

domicile in certain states and reflect a state’s attitude towards attracting 

RRGs. For example, in 2003, Vermont increased its minimum 

capitalization amount from $500,000 to $1 million—according to 

regulators, to ensure that only RRGs that are serious prospects, with 

sufficient capital, apply to be chartered in the state. On the other hand, 

effective in 2005, the District of Columbia lowered its minimum 

capitalization amount for a RRG incorporated as a stock insurer (that is, 

owned by shareholders who hold its capital stock) from $500,000 to 

$400,000 to make it easier for RRGs to charter there.

75Since April 1995 Hawaii chartered seven RRGs to insure VSCs, approving the last such 

charter in December 2000. As of June 2005, only three of these RRGs remained domiciled in 

Hawaii. Since January 2001, South Carolina has chartered six RRGs to insure VSCs, with the 

most recent charter approval in April 2002. Since January 2004, the District of Columbia has 

chartered three RRGs to insure VSCs, with two of these three RRGs in 2005 redomiciling 

from Hawaii. 
Page 46 GAO-05-536 Risk Retention Groups

• Corporate forms: In 2005, one of the six leading domiciliary states—the 

District of Columbia—enacted legislation that permits RRGs to form 

“segregated accounts.” The other leading domiciliary states permit the 

formation of segregated accounts or “protected cells” for other types of 

captives but not for their RRGs. According to the District’s statute, a 

captive insurer, including an RRG, may fund separate accounts for 

individual RRG members or groups of members with common risks, 

allowing members to segregate a portion of their risks from the risks of 

other members of the RRG.76 According to the District regulator, RRG 

members also would be required to contribute capital to a common 

account that could be used to cover a portion of each member’s risk. 

The District regulator also noted that the segregated cell concept has 

never been tested in insolvency; as a result, courts have not yet 

addressed the concept that the cells are legally separate.

• Willingness to charter entrepreneurial RRGs: RRGs may be formed 

with only a few members, with the driving force behind the formation 

being, for example, a service provider, such as the RRG’s management 

company or a few members. These RRGs are referred to as 

“entrepreneurial” RRGs because their future success is often contingent 

on recruiting additional members as insureds. In 2004, South Carolina 

regulators reported they frequently chartered entrepreneurial RRGs to 

offset what they described as the “chicken and egg” problem—their 

belief that it can be difficult for RRGs to recruit new members without 

having the RRG already in place. Regulators in several other leading 

domiciliary states have reported they would be willing to charter such 

RRGs if their operational plans appeared to be sound but few reported 

having done so. However, regulators in Vermont said that they would 

not charter entrepreneurial RRGs because they often were created to 

make a profit for the “entrepreneur,” rather than helping members 

obtain affordable insurance. (We discuss entrepreneurial RRGs later in 

the report.)

76The core company would still be formed as a stock company, mutual, or a reciprocal. A 

stock insurer is an incorporated entity with capital stock divided into shares, which is 

owned by its shareholders. A mutual insurer is an incorporated entity without capital stock, 

which is owned by its policyholders. A reciprocal, also known as a reciprocal exchange, is 

an unincorporated aggregation of subscribers (individual members) who insure each other. 

Reciprocals are administered by an “attorney-in-fact” who, for example, recruits members, 

pays losses, or exchanges insurance contracts. The District regulator also indicated that the 

District would never permit a single member of an RRG to have its own account, even 

though this prohibition is not specifically stated in the District’s statute. 
Page 47 GAO-05-536 Risk Retention Groups

Finally, the redomiciling of three RRGs to two of the leading domiciliary 

states, while subject to unresolved regulatory actions in their original state 

of domicile, also provides some credibility to the regulators’ assertions of 

“regulatory arbitrage.” In 2004, two RRGs redomiciled to new states while 

subject to regulatory actions in their original states of domicile. One RRG, 

which had been operating for several years, redomiciled to a new state 

before satisfying the terms of a consent order issued by its original 

domiciliary state and without notifying its original state of domicile.77 

Although the RRG satisfied the terms of the consent order about 3 months 

after it redomiciled, the regulator in the original domiciliary state reported 

that, as provided by LRRA, once redomiciled, the RRG had no obligation to 

do so. The second RRG, one that had been recently formed, was issued a 

cease and desist order by its domiciliary state because the regulators had 

questions about who actually owned and controlled the RRG. As in the first 

case, the original domiciliary state regulator told us that this RRG did not 

advise them that it was going to redomicile and, once redomiciled, was 

under no legal obligation to satisfy the terms of the cease and desist order. 

The redomiciling, or rather liquidation, of the third RRG is more difficult to 

characterize because its original state of domicile (Hawaii) allowed it to 

transfer some of its assets to a new state of domicile (South Carolina) after 

issuing a cease and desist order to stop it from selling unauthorized 

insurance products directly to the general public, thereby violating the 

provisions of LRRA.78 More specifically, Hawaii allowed the RRG to 

transfer its losses and related assets for its “authorized” lines of insurance 

to South Carolina and required the Hawaiian company to maintain a 

$1 million irrevocable LOC issued in favor of the insurance commissioner 

until such time as the “unauthorized” insurance matter was properly 

resolved. South Carolina permitted the owners of these assets to form a 

77A cease and desist order is a formal regulatory communication from an insurance 

department ordering an insurance company to stop certain activities, such as the issuance 

of new insurance policies.

78Heritage Warranty Mutual Insurance RRG, Inc., Hawaii Department of Commerce and 

Consumer Affairs, Insurance Division, Cease and Desist Order IC-01-003 (March 1, 2001). 

This order was issued about 2 months after Heritage Warranty Mutual Insurance RRG, Inc.,

had entered into a consent agreement in which the RRG voluntarily agreed to surrender its 

license. (The State of Hawaii had earlier charged that the RRG had changed its reinsurance 

program without approval of the insurance commissioner, as required by law.) According to 

the Hawaii Department of Insurance, by December 2000, when the consent order was 

issued, the RRG had already secured preliminary approval from South Carolina to 

redomicile to that state. Finally, in September 2002, the State of Hawaii liquidated Heritage 

Warranty Mutual Insurance RRG, Inc., in response to its sale of unauthorized lines of 

insurance.
Page 48 GAO-05-536 Risk Retention Groups

new RRG offering a similar line of coverage and use a name virtually 

identical to its predecessor in Hawaii. Had these RRGs been chartered as 

traditional insurance companies, they would not have had the ability to 

continue operating in their original state of domicile after redomiciling in 

another state without the original state’s express consent. Because 

traditional companies must be licensed in each state in which they operate, 

the original state of domicile would have retained its authority to enforce 

regulatory actions. 

RRG Failures Have 

Raised Questions 

about the Sufficiency 

of LRRA Provisions for 

RRG Ownership, 

Control, and 

Governance

Because LRRA does not comprehensively address how RRGs may be 

owned, controlled, or governed, RRGs may be operated in ways that do not 

consistently protect the best interests of their insureds. For example, while 

self-insurance is generally understood as risking one’s own money to cover 

losses, LRRA does not specify that RRG members, as owners, make capital 

contributions beyond their premiums or maintain any degree of control 

over their governing bodies (such as boards of directors). As a result, in the 

absence of specific federal requirements and using the latitude LRRA 

grants them, some leading domiciliary regulators have not required all RRG 

insureds to make at least some capital contribution or exercise any control 

over the RRG. Additionally, some states have allowed management 

companies or a few individuals to form what are called “entrepreneurial” 

RRGs. Consequently, some regulators were concerned that RRGs were 

being chartered primarily for purposes other than self-insurance, such as 

making a profit for someone other than the collective insureds. Further, 

LRRA does not recognize that separate companies typically manage RRGs. 

Yet, past RRG failures suggest that sometimes management companies 

have promoted their own interests at the expense of the insureds. Although 

LRRA does not address governance issues such as conflicts of interest 

between management companies and insureds, Congress previously has 

enacted safeguards to address similar issues in the mutual fund industry. 

Finally, some of these RRG failures have resulted in thousands of insureds 

and their claimants losing coverage, some of whom may not have been fully 

aware that their RRG lacked state insurance insolvency guaranty fund 

coverage or the consequences of lacking such coverage.
Page 49 GAO-05-536 Risk Retention Groups

While RRGs Are a Form of 

Self-Insurance, Not All RRG 

Insureds Are Equity Owners 

or Have the Ability to 

Exercise Control

While RRGs are a form of self-insurance on a group basis, LRRA does not 

require that RRG insureds make a capital investment in their RRG and 

provides each state considerable authority to establish its own rules on 

how RRGs will be chartered and regulated. Most of the regulators from the 

leading domiciliary states reported that they require RRGs to be organized 

so that all insureds make some form of capital contribution but other 

regulators do not, or make exceptions to their general approach.79 

Regulators from Vermont and Nevada emphasized that it was important for 

each member to have “skin in the game,” based on the assumption that 

members who make a contribution to the RRG’s capital and surplus would 

have a greater interest in the success of the RRG. The regulator from 

Nevada added that if regulators permitted members to participate without 

making a capital contribution, they were defeating the spirit of LRRA. 

However, another of the leading domiciliary states, the District of 

Columbia, does not require insureds to make capital contributions as a 

condition of charter approval and has permitted several RRGs to be formed 

accordingly. The District regulator commented that LRRA does not require 

such a contribution and that some prospective RRG members may not have 

the financial ability to make a capital contribution. Further, despite 

Vermont’s position that RRG members should make a capital contribution, 

the Vermont regulators said they occasionally waive this requirement under 

special circumstances; for example, if the RRG was already established and 

did not need any additional capital. In addition, several of the leading 

domiciliary states, including Arizona, the District of Columbia, and Nevada, 

would consider allowing a nonmember to provide an LOC to fund the 

capitalization of the RRG.

However, as described by several regulators, including those in Hawaii and 

South Carolina, even when members do contribute capital to the RRG, the 

amount contributed can vary and be quite small. For instance, an investor 

with a greater amount of capital, such as a hospital, could initially 

capitalize an RRG, and expect smaller contributions from members (for 

example, doctors) with less capital. Or, in an RRG largely owned by one 

member, additional members might be required only to make a token 

investment, for example, $100 or less. As a result, an investment that small 

79While the statutes of the six leading domiciliary states do not require that RRG members 

make a minimum capital contribution to the RRG, the regulators in some of these states, as 

a condition of granting an RRG’s application for a state charter, exercise their discretionary 

authority to require RRG members to make capital contributions to the RRG.
Page 50 GAO-05-536 Risk Retention Groups

would be unlikely to motivate members to feel like or behave as “owners” 

who were “self-insuring” their risks. 

LRRA also does not have a requirement that RRG insureds retain control 

over the management and operation of their RRG. However, as discussed 

previously, the legislative history indicates that some of the act’s singlestate regulatory framework and other key provisions were premised not 

only on ownership of an RRG being closely tied to the interests of the 

insureds, but also that the insureds would be highly motivated to ensure 

proper management of the RRG. Yet, in order to make or direct key 

decisions about a company’s operations, the insureds would have to be 

able to influence or participate in the company’s governing body (for 

example, a board of directors).80 A board of directors is the focal point of 

an insurer’s corporate governance framework and ultimately should be 

responsible for the performance and conduct of the insurer.81 Governance 

is the manner in which the boards of directors and senior management 

oversee a company, including how they are held accountable for their 

actions.82

80Membership: “[I]t is the committee’s intent that ‘members’ include the equity owners of, or 

contributors to, the risk retention group, as well as entities affiliated with or related to such 

owners or contributors. Membership in a risk retention group should be limited to active 

participants in a risk retention program.” H. Rep. No. 97-190, at 10, reprinted in 1981 

U.S.C.A.A.N. at 1439; S. Rep. No. 97-172, at 9. Single-state regulation: “Because risk 

retention groups will be providing insurance coverage only to their own members, and not 

the public at large, it is believed that regulation by the chartering jurisdiction will be 

sufficient to provide adequate supervision of these groups.” H. Rep. No. 97-190, at 15 (1981), 

reprinted in 1981 U.S.C.A.A.N. at 1444; S. Rep. No. 97-172, at 13. Reasons for exclusion from 

guaranty funds: “First, risk retention groups are not full-fledged multi-line insurance 

companies, but limited operations providing coverage only to member companies, and only 

for a narrow group of coverages. Second, there will be a strong incentive for risk retention 

groups to set adequate premiums and establish adequate reserves if each member knows 

there is no other source of funds (other than its own corporate assets) from which to pay 

claims.” H. Rep. No. 97-190, at 16 (1981), reprinted in 1981 U.S.C.A.A.N. at 1445; S. Rep. No. 

97-172, at 15 (1981).

81Generally speaking, a board of directors is a group of individuals elected by shareholders 

that represents the owners of a company and oversees the management of the company. 

RRG members who receive the right to vote through the RRG’s governing instruments (e.g., 

articles of incorporation, bylaws) may elect some or all of the RRG’s governing body, 

providing the insureds with a means of influencing corporate policymaking.

82International Association of Insurance Supervisors, Insurance Core Principles on 

Corporate Governance (Basel, Switzerland: 2004). 
Page 51 GAO-05-536 Risk Retention Groups

Most leading state regulators said they expect members of RRGs to exert 

some control over the RRG by having the ability to vote for directors, even 

though these rights sometimes vary in proportion to the size of a member’s 

investment in the RRG or by share class.83 Most of the leading state 

regulators generally define “control” to be the power to direct the 

management and policies of an RRG as exercised by an RRG’s governing 

body, such as its board of directors. However, regulators from the District 

of Columbia asserted that they permit RRGs to issue nonvoting shares to 

their insureds because some members are capable of making a greater 

financial contribution than others and, in exchange for their investment, 

will seek greater control over the RRG. The regulators noted that allowing 

such arrangements increases the availability of insurance and has no 

adverse effect on the financial solvency of the RRG. Further, the District of 

Columbia permits nonmembers (that is, noninsureds) to appoint or vote for 

directors. In addition, we found that even regulators who expect all RRG 

members to have voting rights (that is, at a minimum a vote for directors) 

sometimes make exceptions. For example, an RRG domiciled in Vermont 

was permitted to issue shares that did not allow insureds to vote for 

members of the RRG’s governing body. The Vermont regulators reported 

that the attorney forming the RRG believed issuing the shares was 

consistent with the department’s position that RRG members should have 

“voting rights” because under Vermont law all shareholders are guaranteed 

other minimal voting rights.84

83For example, hospitals and doctors, respectively, may be assigned class A and class B 

shares, with each classification of shareholder entitled to vote for a different number of 

directors; additionally, a shareholder could be issued nonvoting shares. 

84Five of the leading domiciliary states—Arizona, the District of Columbia, Hawaii, Nevada, 

and Vermont—allowed us to review the bylaws and articles of incorporation of their three 

most recently domiciled RRGs, providing us an opportunity to review a sampling of their 

chartering practices.
Page 52 GAO-05-536 Risk Retention Groups

While most regulators affirmed that they expect RRG members to own and 

control their RRGs, how these expectations are fulfilled is less clear when 

an organization, such as an association, owns an RRG. Four states—

Arizona, District of Columbia, South Carolina, and Vermont—reported that 

they have chartered RRGs that are owned by a single or multiple 

organizations, rather than individual persons or businesses.85 One of these 

states—the District of Columbia—permits noninsureds to own the 

organizations that formed the RRG. However, the District regulator said 

that while the noninsureds may own the voting or preferred stock of the 

association, they do not necessarily have an interest in controlling the 

affairs of the RRG. In addition, Arizona has permitted three risk purchasing 

groups (RPGs) to own one RRG.86 While the three RPGs, organized as 

domestic corporations in another state, collectively have almost 8,000 

policyholders, four individuals, all of whom are reported to be RRG 

insureds by the Arizona regulator, are the sole owners of all three RPGs.87

85Nevada regulators did not respond to our question on whether they had chartered RRGs 

owned by an organization.

86RPGs are businesses with similar risk exposures that join to purchase liability insurance as 

a single entity.

87This structure illustrates the ambiguity surrounding LRRA’s ownership requirement as 

contained in 15 U.S.C. § 3902(a)(4)(E). This provision has been interpreted by both the U.S. 

Department of Commerce and NAIC to require that all insureds have an ownership interest 

in the RRG. See, U.S. Department of Commerce, Liability Risk Retention Act of 1986: 

Implementation Report (Washington, D.C.: 1987), at 64; and NAIC Model Risk Retention 

Act (June 1999), § 2.K Drafter’s Note. However, LRRA does not explicitly state that all 

insureds must own the RRG, and the matter remains open to interpretation. See, e.g., 

Attorneys’ Liability Assurance Society v. Fitzgerald, 174 F.Supp.2d 619, 632-34 (W.D. Mich. 

2001) noting the ambiguity surrounding the definition of “member” as it relates to LRRA’s 

ownership requirement. According to the Arizona regulator, the three RPGs are the 

policyholders and owners of the RRG, but the members of the RPGs who are insured by the 

RRG do not have an ownership interest in the RRG. Therefore, to the extent this Arizona 

RRG has insureds that do not have an ownership interest in either the RRG or any of the 

RPGs that own the RRG, this would seem to depart from an interpretation of LRRA’s 

ownership requirement that all insureds must own the RRG. The domiciliary state of the 

three RPGs identified the number of entities that purchased insurance policies through the 

three RPGs. However, we do not know if each policyholder obtained their insurance from 

the Arizona-domiciled RRG or from another insurance company used by the RPG.
Page 53 GAO-05-536 Risk Retention Groups

Regulators Expressed 

Concerns That Some RRGs 

Might Be Operated to Make 

Money for an Entrepreneur, 

Rather Than to Provide SelfInsurance

The chartering of an “entrepreneurial” RRG—which regulators generally 

define as formed by an individual member or a service provider, such as a 

management company, for the primary purpose of making profits for 

themselves—has been controversial. According to several regulators, 

entrepreneurial RRGs are started with a few members and need additional 

members to remain viable. The leading domiciliary regulators have taken 

very different positions on entrepreneurial RRGs, based on whether they 

thought the advantages entrepreneurs could offer (obtaining funding and 

members) outweighed the potential adverse influence the entrepreneur 

could have on the RRG. We interviewed regulators from the six leading 

domiciliary states to obtain their views on entrepreneurial RRGs. In 2004, 

South Carolina regulators reported they firmly endorsed chartering 

entrepreneurial RRGs because they believed that already chartered RRGs 

stand a better chance of attracting members than those in the planning 

stages.88 They cited cases of entrepreneurial RRGs they believe have met 

the insurance needs of nursing homes and taxicab drivers. However, 

regulators from Vermont and Hawaii had strong reservations about this 

practice because they believe the goal of entrepreneurs is to make money 

for themselves—and that the pursuit of this goal could undermine the 

financial integrity of the RRG because of the adverse incentives that it 

creates. Vermont will not charter entrepreneurial RRGs and has 

discouraged them from obtaining a charter in Vermont by requiring RRGs 

(before obtaining their charter) to have a critical mass of members capable 

of financing their own RRG. In addition, the Vermont regulators said they 

would not permit an entrepreneur, if just a single owner, to form an RRG as 

a means of using LRRA’s regulatory preemption to bypass the licensing 

requirements of the other states in which it planned to operate. Two of the 

other leading domiciliary states—Arizona and Nevada—were willing to 

charter entrepreneurial RRGs, providing they believed that the business 

plans of the RRGs were sound.89 

Finally, some of the leading state regulators that have experience with 

chartering entrepreneurial RRGs told us that they recognized that the 

88In July 2005, South Carolina officials further commented that the state does not oppose 

licensing entrepreneurial RRGs provided the group has a sound business plan and satisfies 

other department requirements. The officials noted that they require entrepreneurial RRGs 

to meet more stringent initial capital and surplus requirements than other RRGs chartered 

by their state and that they have conducted “target examinations” on several entrepreneurial 

RRGs to ensure their compliance with the state’s statutes.

89According to District regulators, they were not familiar with the term entrepreneurial RRG.
Page 54 GAO-05-536 Risk Retention Groups

interests of the RRG insureds have to be protected and that they took 

measures to do so. For example, the regulators from South Carolina said 

that even if one member largely formed and financed an RRG, they would 

try to ensure that the member would not dominate the operations. 

However, they admitted that the member could do so because of his or her 

significant investment in the RRG. Alternatively, the regulator from Hawaii 

reported that the state’s insurance division, while reluctant to charter 

entrepreneurial RRGs, would do so if the RRG agreed to submit to the 

division’s oversight conditions. For example, to make sure service 

providers are not misdirecting money, the division requires entrepreneurial 

RRGs to submit copies of all vendor contracts. The Hawaii regulator also 

told us that the insurance division requires all captives to obtain the 

insurance commissioner’s approval prior to making any distributions of 

principal or interest to holders of surplus notes. However, he concluded 

that successful oversight ultimately depended on the vigilance of the 

regulator and the willingness of the RRG to share documentation and 

submit to close supervision. 

LRRA Lacks Governance 

Standards to Protect RRG 

Insureds from Management 

Companies with Potential 

Conflicts of Interest 

LRRA imposes no governance requirements that could help mitigate the 

risk to RRG insureds from potential abuses by other interests, such as their 

management companies, should they choose to maximize their profits at 

the expense of the best interests of the RRG insureds. Governance rules 

enhance the independence and effectiveness of governing bodies, such as 

boards of directors, and improve their ability to protect the interests of the 

company and insureds they serve. Unlike a typical company where the 

firm’s employees operate and manage the firm, an RRG usually is operated 

by a management company and may have no employees of its own. 

However, while management companies and other service providers 

generally provide valuable services to RRGs, the potential for abuse arises 

if the interests of a management company are not aligned with the interests 

of the RRG insureds to consistently obtain self-insurance at the most 

affordable price consistent with long-term solvency. 

These inherent conflicts of interest are exemplified in the circumstances 

surrounding 10 of 16 RRG failures that we examined.90 For example, 

members of the companies that provided management services to Charter 

90Since 1990, 22 RRGs have failed using NAIC’s definition of failure. We examined 16 of the 

22 failures. See appendix I for additional information on how we selected RRGs to examine 

and appendix IV for a list of the failures.
Page 55 GAO-05-536 Risk Retention Groups

Risk Retention Group Insurance Company (Charter) and Professional 

Mutual Insurance Company Risk Retention Group (PMIC) also served as 

officers of the RRGs’ boards of directors, which enabled them to make 

decisions that did not promote the welfare of the RRG insureds. In other 

instances, such as the failure of Nonprofits Mutual Risk Retention Group, 

Inc. (Nonprofits), the management company negotiated terms that made it 

difficult for the RRG to terminate its management contract and place its 

business elsewhere. Regulators knowledgeable about these and other 

failures commented that the members, while presumably self-insuring their 

risks, were probably more interested in satisfying their need for insurance 

than actually running their own insurance company. 

The 2003 failure of three RRGs domiciled in Tennessee—American 

National Lawyers Insurance Reciprocal Risk Retention Group (ANLIR), 

Doctors Insurance Reciprocal Risk Retention Group (DIR), and The 

Reciprocal Alliance Risk Retention Group (TRA)—further illustrates the 

potential risks and conflicts of interest associated with a management 

company operating an RRG.91 In pending litigation, the State of Tennessee’s 

Commissioner of Commerce and Insurance, as receiver for the RRGs, has 

alleged that the three RRGs had common characteristics, such as (1) being 

formed by Reciprocal of America (ROA), a Virginia reciprocal insurer, 

which also served as the RRGs’ reinsurance company; (2) having a 

management company, The Reciprocal Group (TRG), which also served as 

the management company and attorney-in-fact for ROA; (3) receiving loans 

from ROA, TRG, and their affiliates; and (4) having officers and directors in 

common with ROA and TRG.92 The receiver has alleged that through the 

terms of RRGs’ governing instruments, such as its bylaws, management 

agreements with TRG (which prohibited the RRGs from replacing TRG as 

91The failures of the Tennessee RRGs are at the center of pending lawsuits filed by both the 

Tennessee and Virginia regulators, as receivers, and class action lawsuits filed by insureds 

of the Tennessee RRGs. See Flowers v. General Reinsurance Corporation et al., No. 04-CV2078 (W.D. Tenn. filed Feb. 9, 2004); Gross v. General Reinsurance Corporation et al., No. 

03-CV-955 (E.D. Va. filed Nov. 12, 2003); Michael A. Jaynes, P.C. et al. v. General 

Reinsurance Corporation et al. No. 04-2479 (W.D. Tenn. filed July 13, 2004); Fullen et al. v. 

General Reinsurance Corporation et al., No. 03-2195B (W.D. Tenn. filed Apr. 3, 2003); 

Herrick et al. v. General Reinsurance Corporation et al., No. 03-W-329-N (M.D. Ala. filed 

Mar. 26, 2003); and Crenshaw Community Hospital et al. v. General Reinsurance 

Corporation et al., No. 03-M-338-N (M.D. Ala. filed Mar. 28, 2003). 

92The Circuit Court for the City of Richmond determined that “ROA and TRG, as attorney-infact for ROA, operate as, and comprise a single insurance business enterprise.”

Commonwealth of Virginia v. Reciprocal of America, et al., No. CH03000135-00 (Final 

Order Appointing Receiver, Jan. 29, 2003). 
Page 56 GAO-05-536 Risk Retention Groups

their exclusive management company for as long as the loans were 

outstanding), and the common network of interlocking directors among 

the companies, TRG effectively controlled the boards of directors of the 

RRGs in a manner inconsistent with the best interests of the RRGs and 

their insureds.93 As alleged in the complaint filed by the Tennessee 

regulator, one such decision involved a reinsurance agreement, in which 

the RRGs ceded 90-100 percent of their risk to ROA with a commensurate 

amount of premiums—conditions that according to the regulator 

effectively prevented the RRGs from ever operating independently or 

retaining sufficient revenue to pay off their loans with ROA and TRG and 

thus remove TRG as their management company.94 Within days after the 

Commonwealth of Virginia appointed a receiver for the rehabilitation or 

liquidation of ROA and TRG, the State of Tennessee took similar actions for 

the three RRGs domiciled in Tennessee.95

The following failures of other RRGs also illustrate behavior suggesting 

that management companies and affiliated service providers have 

promoted their own interests at the expense of the RRG insureds:

• According to the Nebraska regulators, Charter failed in 1992 because its 

managers, driven to achieve goals to maximize their profits, 

undercharged on insurance rates in an effort to sell more policies. One 

board officer and a company manager also held controlling interests in 

third-party service providers, including the one that determined if claims 

93In the complaint filed by Tennessee, the regulator alleged that the loans were unsecured, 

no payments were anticipated, and due dates for the payments were routinely continued. 

The Tennessee regulator has charged that “despite their independent fiduciary duties to the 

RRGs and the inherent conflicts of interest presented, TRG management executed 

agreements between and among ROA and the RRGs without commercially reasonable terms 

and arms-length negotiation.” Flowers v. General Reinsurance Corporation, et al., No. 04-

CV-2078 (W.D. Tenn. filed Feb. 9, 2004), ¶ 44.

94Flowers v. General Reinsurance Corporation, et al., No. 04-CV-2078 (W.D. Tenn. filed 

Feb. 9, 2004), ¶46.

95ROA and TRG were placed into receivership on January 29, 2003, when the Circuit Court of 

the City of Richmond, Virginia, issued its “Final Order Appointing Receiver for 

Rehabilitation or Liquidation.” The court determined that the receivership was necessary 

because any further transaction of business would be hazardous to their policyholders and 

other affected parties; for example, their creditors and the public. The Chancery Court of 

the State of Tennessee placed the three RRGs—ANLIR, DIR, and TRA—into receivership on 

January 31, 2003, due to the hazardous financial condition and receivership of ROA, with 

which the RRGs reinsured substantially all of their business. In June 2003, the Court issued a 

Final Order of Liquidation for each of the three RRGs.
Page 57 GAO-05-536 Risk Retention Groups

should be paid. Further, the board officer and a company manager, as 

well as the RRG, held controlling interests in the RRG’s reinsurance 

company. A Nebraska regulator noted that when a reinsurance company 

is affiliated with the insurer it is reinsuring: (1) the reinsurer’s incentive 

to encourage the insurer to adequately reserve and underwrite is 

reduced and (2) the insurer also will be adversely affected by any 

unprofitable risk it passes to the reinsurer.

• PMIC, which was domiciled in Missouri and formed to provide medical 

malpractice insurance coverage for its member physicians, was 

declared insolvent in 1994. The RRG’s relationship with the companies 

that provided its management services undermined the RRG in several 

ways. The president of PMIC was also the sole owner of Corporate 

Insurance Consultants (CIC), a company with which PMIC had a 

marketing service and agency agreement. As described in the RRG’s 

examination reports, the RRG paid CIC exorbitant commissions for 

services that CIC failed to provide, but allowed CIC to finance collateral 

loans made by the reinsurance company to CIC. In turn, CIC had a 

significant ownership stake in the RRG’s reinsurance company, which 

also provided PMIC with all of its personnel. The reinsurer’s own 

hazardous financial condition resulted in the failure of PMIC. 

• In the case of Nonprofits, Vermont regulators indicated that essentially 

the excessive costs of its outsourced management company and 

outsourced underwriting and claims operations essentially contributed 

to its 2000 failure. The regulators said that the management company 

was in a position to exert undue influence over the RRG’s operations 

because the principals of the management company loaned the RRG its 

start-up capital in the form of irrevocable LOCs. In addition to charging 

excessive fees, the management company also locked the RRG into a 

management contract that only allowed the RRG to cancel the contract 

1 year before its expiration. If the RRG did not, the contract would 

automatically renew for another 5 years, a requirement of which the 

RRG insureds said they were unaware. 

Although LRRA has no provisions that address governance controls, 

Congress has acted to provide such controls in similar circumstances in 

another industry. In response to conditions in the mutual fund industry, 

Congress passed the Investment Company Act of 1940 (1940 Act). The 1940 

Act, as implemented by the Securities and Exchange Commission (SEC), 

establishes a system of checks and balances that includes participation of 
Page 58 GAO-05-536 Risk Retention Groups

independent directors on mutual fund boards, which oversee transactions 

between the mutual fund and its investment adviser.96 A mutual fund’s 

structure and operation, like that of an RRG, differs from that of a 

traditional corporation. In a typical corporation, the firm’s employees 

operate and manage the firm; the corporation’s board of directors, elected 

by the corporation’s stockholders, oversees its operation. Unlike a typical 

corporation, but similar to many RRGs, a typical mutual fund has no 

employees and contracts with another party, the investment adviser, to 

administer the mutual fund’s operations. 

Recognizing that the “external management” of most mutual funds presents 

inherent conflicts between the interests of the fund shareholders and those 

of the fund’s investment adviser, as well as potential for abuses of fund 

shareholders, Congress included several safeguards in the 1940 Act. For 

example, with some exceptions, the act requires that at least 40 percent of 

the board of directors of a mutual fund be disinterested (that is, that 

directors be independent of the fund’s investment adviser as well as certain 

other persons having significant or professional relationships with the 

fund) to help ensure that the fund is managed in the best interest of its 

shareholders.97 The 1940 Act also regulates the terms of contracts with 

investment advisers by imposing a maximum contract term and by 

guaranteeing the board’s and the shareholders’ ability to terminate an 

investment adviser contract.98 The act also requires that the terms of any 

96For purposes of this report, the term “mutual fund” refers generally to open-end 

investment companies required to register with SEC under the 1940 Act.

9715 U.S.C. § 80a-10(a). Persons who are not “interested persons” of the fund are referred to 

as “independent” or “disinterested directors.” Section 2(a)(19) of the 1940 Act [codified at 15 

U.S.C. § 80a-2(a)(19)] defines an “interested person” of a mutual fund to include any person, 

partner, or employee of the mutual fund’s investment adviser. SEC has authority under the 

1940 Act to promulgate rules to address a constantly changing financial services industry 

environment in which mutual funds and other investment companies operate. While the 

1940 Act requires that 40 percent of a fund’s directors be independent, SEC has adopted 

several exemptive rules that permit mutual fund companies to engage in certain 

transactions that present conflicts of interests and would otherwise be prohibited or 

restricted under the 1940 Act, if at least 75 percent of the members of the fund’s board of 

directors and the board chair are disinterested persons.

98After an initial term of up to 2 years, the investment adviser contract may be renewed 

“annually” upon the approval of a majority of the mutual fund’s independent directors or a 

majority of the shareholders. 15 U.S.C. § 80a-15(a). The mutual fund’s board of directors or 

its shareholders have the right to terminate the investment adviser contract at any time after 

providing adequate advance notice (60 days or less) as specified in the contract. 15 U.S.C. § 

80a-15(c).
Page 59 GAO-05-536 Risk Retention Groups

contract with the investment adviser and the renewal of such contract be 

approved by a majority of directors who are not parties to the contract or 

otherwise interested persons of the investment adviser. Further, the 1940 

Act imposes a fiduciary duty upon the adviser in relation to its level of 

compensation and provides the fund and its shareholders with the right to 

sue the adviser should the fees be excessive.99 The management controls 

imposed on mutual fund boards do not supplant state law on duties of “care 

and loyalty” that oblige directors to act in the best interests of the mutual 

fund, but enhance a board’s ability to perform its responsibilities consistent 

with the protection of investors and the purposes of the 1940 Act. 

RRG Members May Not 

Realize They Lack Guaranty 

Fund Protection 

In addition to lacking comprehensive provisions for ownership, control, 

and governance of RRGs, LRRA does not mandate that RRGs disclose to 

their insureds that they lack state insurance insolvency guaranty fund 

protection. LRRA’s legislative history indicates that the prohibition on 

RRGs participating in state guaranty funds (operated to protect insureds 

when traditional insurers fail) stemmed, in part, from a belief that the lack 

of protection would help motivate RRG members to manage the RRG 

prudently. LRRA does provide nondomiciliary state regulators the authority 

to mandate the inclusion of a specific disclosure, which informs RRG 

insureds that they lack guaranty fund coverage, on insurance policies 

issued to residents of their state (see fig. 8).100 However, LRRA does not 

provide nondomiciliary states with the authority to require the inclusion of 

this disclaimer in policy applications or marketing materials. For example, 

of 40 RRGs whose Web sites we were able to identify, only 11 disclosed in 

their marketing material that RRGs lack guaranty fund protection. In

99Section 36(b) of the Investment Company Act [codified at 15 U.S.C. § 80a-35(b)] authorizes 

excessive fee claims against officers, directors, members of an advisory board, investment 

advisers, depositors, and principal underwriters if such persons received compensation 

from the fund. In addition, pursuant to Section 206 of the Investment Advisers Act of 1940, 

an investment adviser has a fiduciary duty to act in the best interests of a fund it advises. Act 

of August 22, 1940, c. 686, 54 Stat. 852, § 206 (codified as amended at 15 U.S.C. § 80b-6). 

Typically, under state common law a fiduciary must act with the same degree of care and 

skill that a reasonably prudent person would use in connection with his or her affairs. See 

also GAO/GGD-00-126. 

10015 U.S.C. § 3902(a)(1)(I). In addition to the six domiciliary states, we conducted further 

research in eight additional states—California, Florida, Illinois, New York, Ohio, 

Pennsylvania, Tennessee, and Texas—to obtain the perspectives of other states that had 

domiciled few or no RRGs. These states all required that RRGs operating in their state 

include the lack of guaranty fund disclosure on their policies.
Page 60 GAO-05-536 Risk Retention Groups

addition, 11 of the RRGs omitted the words “Risk Retention Group” from 

their names.101

Figure 8: Permitted Wording of Guaranty Fund Disclosure in LRRA

All of the six leading domiciliary states have adopted varying statutory 

requirements that RRGs domiciled in their states include the disclosure in 

their policies, regardless of where they operate. The statutes of Hawaii, 

South Carolina, and the District of Columbia require that the disclosure be 

printed on applications for insurance, as well as on the front and 

declaration page of each policy. By requiring that the disclosure be printed 

on insurance applications, prospective RRG insureds have a better chance 

of understanding that they lack guaranty fund protection. Regulators in 

South Carolina, based on their experience with the failure of Commercial 

Truckers RRG in 2001, also reported that they require insureds, such as 

those of transportation and trucking RRGs, to place their signature beneath 

the disclosure. The regulators imposed this additional requirement because 

they did not believe that some insureds would be as likely to understand 

the implications of not having guaranty fund coverage as well as other 

insureds (for example, hospital conglomerates). In contrast, the statutes of 

Arizona and Vermont require only that the disclosure be printed on the 

insurance policies. The six leading domiciliary state regulators had mixed 

views on whether the contents of the disclosure should be enhanced, but 

none recommended that LRRA be changed to permit RRGs to have 

guaranty fund protection.

101LRRA requires that the name of any RRG should include the phrase “Risk Retention 

Group.” 15 U.S.C. § 3901(a)(4)(H). We performed our initial search of RRG Web sites in 

August 2004, based on a listing of 160 RRGs NAIC identified active as of the beginning of 

June 2004. We updated the results of the initial search in May 2005, for the same group of 

RRGs.

NOTICE

This policy is issued by your risk retention group. Your risk retention group may not be subject to 

all of the insurance laws and regulations of your State. State insurance insolvency guaranty 

funds are not available for your risk retention group.

Source: LRRA.
Page 61 GAO-05-536 Risk Retention Groups

It is unclear whether RRG insureds who obtain insurance through 

organizations that own RRGs understand that they will not have guaranty 

fund coverage. Four states—Arizona, the District of Columbia, South 

Carolina, and Vermont—indicated that they have chartered RRGs owned 

by single organizations. When an organization is the insured of the RRG, 

the organization receives the insurance policy with the disclosure about 

lack of guaranty fund protection. Whether the organization’s members, who 

are insured by the RRG, understand that they lack guaranty fund coverage 

is less clear. The Vermont regulators indicated that members typically are 

not advised that they lack guaranty fund coverage before they receive the 

policy. Thus, the regulators recommended that applications for insurance 

should contain the disclosure as well. The Arizona regulator reported that 

the insurance applications signed by the insureds of the Arizona-domiciled 

RRG owned by three RPGs did not contain a disclosure on the lack of 

guaranty fund coverage, although the policy certificates did. Further, he 

reported that the practices of RPGs were beyond his department’s 

jurisdiction and that he does not review them. 

Not understanding that RRG insureds are not protected by guaranty funds 

has serious implications for RRG members and their claimants, who have 

lost coverage as a result of RRG failures. For example, of the 21 RRGs that 

have been placed involuntarily in liquidation, 14 either have or had 

policyholders whose claims remain or are likely to remain partially unpaid 

(see app. IV).102 Member reaction to the failure of the three RRGs domiciled 

in Tennessee further illustrates that the wording and the placement of the 

disclosure may be inadequate.103 In 2003, an insurance regulator from 

Virginia, a state where many of the RRG insureds resided, reported that he 

received about 150–200 telephone calls from the insureds of these RRGs 

and the insureds did not realize they lacked “guaranty fund” coverage, 

asking instead why they didn’t have “back-up” insurance when their 

insurance company failed. He explained that the insureds were “shocked” 

to discover they were members of an RRG, rather than a traditional 

insurance company and that they had no guaranty fund coverage. 

102One of the 22 RRGs that “failed” using NAIC’s definition of failure, which includes 

companies placed into rehabilitation, was not liquidated. 

103In 1987, the U.S. Department of Commerce concluded that LRRA’s provision for the 

guaranty fund notice was insufficient. The department concluded that greater disclosure 

would be provided if the guaranty fund disclosure would be required on application forms. 

U.S. Department of Commerce, Liability Risk Retention Act of 1986: Implementation 

Report (Washington, D.C.: 1987).
Page 62 GAO-05-536 Risk Retention Groups

According to the regulator, they commented, “Who reads their insurance 

policies?” Regulators in Tennessee also noted that insureds of the RRGs, 

including attorneys, hospitals, and physicians did not appear to understand 

the implications of self-insuring their risks and the lack of guaranty fund 

coverage. In 2004, the State of Tennessee estimated that the potential 

financial losses from these failures to the 50,000 or so hospitals, doctors, 

and attorneys that were members of the Tennessee RRGs could exceed 

$200 million, once the amount of unpaid claims were fully known.104 

Other regulators, including those in Missouri, in response to our survey, 

and New York, in an interview, also expressed concern that some RRG 

members might not fully understand the implications of a lack of guaranty 

fund protection and were not the “sophisticated” consumers that they 

believe may have been presumed by LRRA. In addition, in response to our 

survey, regulators from other states including New Mexico and Florida 

expressed specific concerns about third-party claimants whose claims 

could go unpaid when an RRG failed and the insured refused or was unable 

to pay claims. The Florida regulator noted that the promoters of the RRG 

could accentuate the “cost savings” aspect of the RRG at the expense of 

explaining the insured’s potential future liability in the form of unpaid 

claims due to the absence of guaranty funds should the RRG fail. In 

addition, regulators who thought that protections in LRRA were 

inadequate, such as those in Wyoming, Virginia, and Wisconsin, tended to 

view lack of guaranty fund protection as a primary reason for developing 

and implementing more uniform regulatory standards or providing 

nondomiciliary states greater regulatory authority over RRGs.

Lack of Guaranty Fund 

Protection Also Has 

Consequences for 

Consumers Who Purchase 

Extended Service Contracts 

Lack of guaranty fund protection also can have unique consequences for 

consumers who purchase extended service contracts from service contract 

providers. Service contract providers form RRGs to insure their ability to 

pay claims on extended service contracts—a form of insurance also known 

as contractual liability insurance—and sell these contracts to consumers.105 

In exchange for the payment (sometimes substantial) made by the 

consumer, the service contract provider commits to performing services—

104Tennessee Department of Commerce and Insurance media release, dated February 9, 

2004. In addition, see appendix IV for more recent information on expected losses.

105Contractual liability insurance is liability assumed under any contract or agreement. 

Extended service contracts are also known as “extended warranties.” 
Page 63 GAO-05-536 Risk Retention Groups

for example, paying for repairs to an automobile. Service contract 

providers may be required to set aside some portion of the money paid by 

consumers in a funded “reserve account” to pay resulting claims and may 

have to buy insurance (for example, from the RRG they have joined) to 

guarantee their ability to pay claims.106 However, potential problems result 

from the perception of consumers that what they have purchased is 

insurance, since the service contract provider pays for repairs or other 

service, when in fact it is not.107 Only the service contract provider 

purchases insurance, the consumer signs a contract for services.

The failure of several RRGs, including HOW Insurance Company RRG 

(HOW) in 1994 and National Warranty RRG in 2003, underscores the 

consequences that failures of RRGs that insure service contract providers 

can have on consumers:

• In 1994, the Commonwealth of Virginia liquidated HOW and placed its 

assets in receivership. This RRG insured the ability of home builders to 

fulfill contractual obligations incurred by selling extended service 

contracts to home buyers. While settled out of court, the 

Commonwealth of Virginia asserted that the homeowners who 

purchased the contracts against defects in their homes had been misled 

into believing that they were entitled to first-party insurance benefits—

that is, payment of claims.108 A Virginia regulator said that while his 

department received few calls from the actual insureds (that is, the 

home builders) at the time of failure, they received many calls from 

home owners who had obtained extended service contracts when they 

purchased their home and thought they were insured directly by the 

RRG.

106The amount placed in the account by the service contract provider may or may not be 

based on actuarial standards that provide some assurance that the account would be 

sufficient. 

107Responses to our survey indicated that only eight states regulate vehicle service contracts 

as insurance in their states although others reported that they did so under certain 

conditions. However, we did not perform any additional audit work to compare how the 

regulation of vehicle service contracts as an insurance product could differ from the 

regulation of other insurance products in these states. Moreover, our survey only addressed 

the regulation of vehicle service contracts, not other types of service contracts. 

108See Foster v. Spies et al., No. 3:95-CV-832 (E.D. Va. filed Oct. 10, 1995).
Page 64 GAO-05-536 Risk Retention Groups

• In 2003, National Warranty Insurance RRG failed, leaving behind 

thousands of customers with largely worthless vehicle service contracts 

(VSCs). This RRG, domiciled in the Cayman Islands, insured the ability 

of service contract providers to honor contractual liabilities for 

automobile repairs. Before its failure, National Warranty insured at least 

600,000 VSCs worth tens of millions of dollars. In 2003, the liquidators of 

National Warranty estimated that losses could range from $58 to $74 

million.109 National Warranty’s failure also raised the question of 

whether RRGs were insuring consumers directly, which LRRA 

prohibits—for example, because the laws of many states, including 

Texas, require that the insurance company become directly responsible 

for unpaid claims in the event a service contract provider failed to honor 

its contract.110

The failure of National Warranty also raised the question of whether RRGs 

should insure service contract providers at all because of the potential 

direct damage to consumers. Several regulators, including those in 

California, Wisconsin, and Washington, went even further. In response to 

our survey, they opined that LRRA should be amended to preclude RRGs 

from offering “contractual liability” insurance because such policies cover 

a vehicle service contract provider’s financial obligations to consumers.111

At a minimum, regulators from New York and California, in separate 

interviews, recommended that consumers who purchase extended service 

contracts insured by RRGs at least be notified in writing that the contracts 

they purchase were not insurance and would not qualify for state guaranty 

fund coverage. 

109The loss estimates, from June 2003, and the number of contracts insured, from March 

2004, are based on the most recent loss estimates made available by the liquidators of 

National Warranty.

110In response to our survey, 17 states reported that in the event a service contract provider 

fails to pay or provide service on a vehicle service contract claim within a certain number of 

days after proof of loss has been filed, the contract holder is entitled to make a claim 

directly against the insurance company. For example, the Texas code provides that if a 

service covered under a service contract is not provided to a service contract holder not 

later than the sixtieth day after the date of proof of loss, the insurer shall pay the covered 

amount directly to the service contract holder or provide the required service. Tx. Occ. 

Code § 304.152(a)(2).

111The regulators provided these opinions in response to our question on whether LRRA 

should be amended or clarified. In addition, one other state—Texas—recommended that 

Congress clarify whether RRGs should be permitted to offer contractual liability insurance.
Page 65 GAO-05-536 Risk Retention Groups

Conclusions In establishing RRGs, Congress intended to alleviate a shortage of 

affordable commercial liability insurance by enabling commercial entities 

to create their own insurance companies to self-insure their risks on a 

group basis. RRGs, as an industry, according to most state insurance 

regulators, have fulfilled this vision—and the intent of LRRA—by 

increasing the availability and affordability of insurance for members that 

experienced difficulty in obtaining coverage. While constituting only a 

small portion of the total liability insurance market, RRGs have had a 

consistent presence in this market over the years. However, the number of 

RRGs has increased dramatically in recent years in response to recent 

shortages of liability insurance. While we were unable to evaluate the 

merits of individual RRGs, both state regulators and advocates of the RRG 

industry provided specific examples of how they believe RRGs have 

addressed shortages of insurance in the marketplace. This ability is best 

illustrated by the high number of RRGs chartered over the past 3 years to 

provide medical malpractice insurance, a product which for traditional 

insurers historically has been subject to high or unpredictable losses with 

resulting failures. 

However, the regulation of RRGs by a single state, in combination with the 

recent increase in the number of states new to domiciling RRGs, the 

increase in the number of RRGs offering medical malpractice insurance, 

and a wide variance in regulatory practices, has increased the potential for 

future solvency risks. As a result, RRG members and their claimants could 

benefit from greater regulatory consistency. Insurance regulators have 

recognized the value of having a consistent set of regulatory laws, 

regulations, practices, and expertise through the successful 

implementation of NAIC’s accreditation program for state regulators of 

multistate insurance companies. Vermont and NAIC negotiated the 

relaxation of significant parts of the accreditation standards for RRGs 

because it was unclear how the standards, designed for traditional 

companies, applied to RRGs. However, this agreement allowed states 

chartering RRGs as captives considerable latitude in their regulatory 

practices, even though most RRGs were multistate insurers, raising the 

concerns of nondomiciliary states. With more RRGs than ever before and 

with a larger number of states competing to charter them, regulators, 

working through NAIC, could develop a set of comprehensive, uniform, 

baseline standards for RRGs that would provide a level of consistency that 

would strengthen RRGs and their ability to meet the intent of LRRA. While 

the regulatory structure applicable to RRGs need not be identical to that 

used for traditional insurance companies, uniform, baseline regulatory 
Page 66 GAO-05-536 Risk Retention Groups

standards could create a more transparent and protective regulatory 

environment, enhancing the financial strength of RRGs and increasing the 

trust and confidence of nondomiciliary state regulators. These standards 

could include such elements as the use of a consistent accounting method, 

disclosing relationships with affiliated businesses as specified by NAIC’s 

Model Insurance Holding Company System Regulatory Act, and the 

qualifications and number of staff that insurance departments must have 

available to charter RRGs. These standards could reflect the regulatory 

best practices of the more experienced RRG regulators and address the 

concerns of the states where RRGs conduct the majority of their business. 

Further, such standards could reduce the likelihood that RRGs would 

practice regulatory arbitrage, seeking departments with the most relaxed 

standards. While it may not be essential for RRGs to follow all the same 

rules that traditional insurers follow, it is difficult to understand why all 

RRGs and their regulators, irrespective of where they are domiciled, should 

not conform to a core set of regulatory requirements. Developing and 

implementing such standards would strengthen the foundation of LRRA’s 

flexible framework for the formation of RRGs. 

LRRA’s provisions for the ownership, control, and governance of RRGs may 

not be sufficient to protect the best interests of the insureds. While 

acknowledging that LRRA has worked well to promote the formation of 

RRGs in the absence of uniform, baseline standards, this same flexibility 

has left some RRG insureds vulnerable to misgovernance. In particular, 

how RRGs are capitalized is central to concerns of experienced regulators 

about the chartering of entrepreneurial RRGs because a few insureds or 

service providers, such as management companies, that provide the initial 

capital also may retain control over the RRG to benefit their personal 

interests. Further, RRGs, like mutual fund companies, depend on 

management companies to manage their affairs, but RRGs lack the federal 

protections Congress and SEC have afforded mutual fund companies. As 

evidenced by the circumstances surrounding many RRG failures, the 

interests of management companies inherently may conflict with the 

fundamental interests of RRGs—that is, obtaining stable and affordable 

insurance. Moreover, these management companies may have the means to 

promote their own interests if they exercise effective control over an RRG’s 

board of directors. While RRGs may need to hire a management company 

to handle their day-to-day operations, principles drawn from legislation 

such as the Investment Company Act of 1940 would strongly suggest that 

an RRG’s board of directors would have a substantial number of 

independent directors to control policy decisions. In addition, these 

standards would strongly suggest that RRGs retain certain rights when 
Page 67 GAO-05-536 Risk Retention Groups

negotiating the terms of a management contract. Yet, LRRA has no 

provisions that establish the insureds’ authority over management. Without 

these protections, RRG insureds and their third-party claimants are 

uniquely vulnerable to abuse because they are not afforded the oversight of 

a multistate regulatory environment or the benefits of guaranty fund 

coverage. Nevertheless, we do not believe that RRGs should be afforded 

the protection of guaranty funds. Providing such coverage could further 

reduce any incentives insureds might have to participate in the governance 

of their RRG and at the same time allow them access to funds supplied by 

insurance companies that do not benefit from the regulatory preemption. 

On the other hand, RRG insureds have a right to be adequately informed 

about the risks they could incur before they purchase an insurance policy. 

Further, consumers who purchase extended service contracts (which take 

on the appearance of insurance) from RRG insureds likewise have a right 

to be informed about these risks. The numerous comments that regulators 

received from consumers affected by RRG failures illustrate how 

profoundly uninformed the consumers were.

Finally, while opportunities exist to enhance the safeguards in LRRA, we 

note again the affirmation provided by most regulators responding to our 

survey—that RRGs have increased the availability and affordability of 

insurance. That these assertions often came from regulators who also had 

concerns about the adequacy of LRRA’s regulatory safeguards underscores 

the successful track record of RRGs as a self-insurance mechanism for 

niche groups. However, as the RRG industry has matured, and recently 

expanded, so have questions from regulators about the ability of RRGs to 

safely insure the risks of their members. These questions emerge, 

especially in light of recent failures, because RRGs can have thousands of 

members and operations in multiple states. Thus, in some cases, RRGs can 

take on the appearance of a traditional insurance company—however, 

without the back-up oversight provided traditional insurers by other state 

regulators or the protection of guaranty funds. This is especially 

problematic because RRGs chartered under captive regulations differ from 

other captives—RRGs benefit from the regulatory preemption that allows 

multistate operation with single-state regulation. Further, we find it 

difficult to believe that members of RRGs with thousands of members view 

themselves as “owners” prepared to undertake the due diligence presumed 

by Congress when establishing RRGs as a self-insurance mechanism. 

Because there is no federal regulator for this federally created entity, all 

regulators, in both domiciliary and nondomiciliary states, must look to 

whatever language LRRA provides when seeking additional guidance on 

protecting the residents of their state. Thus, the mandated development 
Page 68 GAO-05-536 Risk Retention Groups

and implementation of uniform, baseline standards for the regulation of 

RRGs, and the establishment of governance protections, could make the 

success of RRGs more likely.

Recommendations for 

Executive Action 

In the absence of a federal regulator to ensure that members of RRGs, 

which are federally established but state-regulated insurance companies, 

and their claimants are afforded the benefits of a more consistent 

regulatory environment, we recommend that the states, acting through 

NAIC, develop and implement broad-based, uniform, baseline standards for 

the regulation of RRGs. These standards should include, but not be limited 

to, filing financial reports on a regular basis using a uniform accounting 

method, meeting NAIC’s risk-based capital standards, and complying with 

the Model Insurance Holding Company System Regulatory Act as adopted 

by the domiciliary state. The states should also consider standards for laws, 

regulatory processes and procedures, and personnel that are similar in 

scope to the accreditation standards for traditional insurers.

Matters for 

Congressional 

Consideration

To assist NAIC and the states in developing and implementing uniform, 

baseline standards for the regulation of RRGs, Congress may wish to 

consider the following two actions:

• Setting a date by which NAIC and the state insurance commissioners 

must develop an initial set of uniform, baseline standards for the 

regulation of RRGs. 

• After that date, making LRRA’s regulatory preemption applicable only to 

those RRGs domiciled in states that have adopted NAIC’s baseline 

standards for the regulation of RRGs. 

To strengthen the single-state regulatory framework for RRGs and better 

protect RRG members and their claimants, while at the same time 

continuing to facilitate the formation and efficient operation of RRGs, 

Congress also may wish to consider strengthening LRRA in the following 

three ways: 

• Requiring that insureds of the RRG qualify as owners of the RRG by 

making a financial contribution to the capital and surplus of the RRG, 

above and beyond their premium. 
Page 69 GAO-05-536 Risk Retention Groups

• Requiring that all of the insureds, and only the insureds, have the right to 

nominate and elect members of the RRG’s governing body. 

• Establishing minimum governance requirements to better secure the 

operation of RRGs for the benefit of their insureds and safeguard assets 

for the ultimate purpose of paying claims. These requirements should be 

similar in objective to those provided by the Investment Company Act of 

1940, as implemented by SEC; that is, to manage conflicts of interest 

that are likely to arise when RRGs are managed by or obtain services 

from a management company, or its affiliates, to protect the interests of 

the insureds. Amendments to LRRA could

• require that a majority of an RRG’s board of directors consist of 

“independent” directors (that is, not be associated with the 

management company or its affiliates) and require that certain 

decisions presenting the most serious potential conflicts, such as 

approving the management contract, be approved by a majority of 

the independent directors; 

• provide safeguards for negotiating the terms of the management 

contract— for example, by requiring periodic renewal of 

management contracts by a majority of the RRG’s independent 

directors, or a majority of the RRG’s insureds, and guaranteeing the 

right of a majority of the independent directors or a majority of the 

insureds to unilaterally terminate management contracts upon 

reasonable notice; and

• impose a fiduciary duty upon the management company to act in the 

best interests of the insureds, especially with respect to 

compensation for its services.

To better educate RRG members, including the insureds of organizations 

that are sole owners of an RRG, about the potential consequences of selfinsuring their risks, and to extend the benefits of this information to 

consumers who purchase extended service contracts from RRG members, 

Congress may wish to consider the following two actions: 

• Expand the wording of the current disclosure to more explicitly 

describe the consequences of not having state guaranty fund protection 

should an RRG fail, and requiring that RRGs print the disclosure 

prominently on policy applications, the policy itself, and marketing 

materials, including those posted on the Internet. These requirements 
Page 70 GAO-05-536 Risk Retention Groups

also would apply to insureds who obtain their insurance through 

organizations that may own an RRG; and 

• Develop a modified version of the disclosure for consumers who 

purchase extended service contracts from providers that form RRGs to 

insure their ability to meet these contractual obligations. The disclosure 

would be printed prominently on the extended service contract 

application, as well as on the contract itself.

Agency Comments and 

Our Evaluation

We requested comments on a draft of this report from the President of the 

National Association of Insurance Commissioners or her designee. The 

Executive Vice President and CEO of NAIC said that the report was “...well 

thought out and well documented,” and provided “...a clear picture of how 

states are undertaking their responsibilities with regard to regulation of 

risk retention groups.” She further stated that our report “...explored the 

issues that are pertinent to the protection of risk retention group members 

and the third-party claimants that are affected by the coverage provided by 

the risk retention groups.” NAIC expressed agreement with our 

conclusions and recommendations. NAIC also provided technical 

comments on the report that were incorporated as appropriate.

As agreed with your office, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies to other interested Members 

of Congress, congressional committees, and the Executive Vice President 

of NAIC and the 56 state and other governmental entities that are members 

of NAIC. We also will make copies available to others upon request. In 

addition, this report will be available at no charge on GAO’s Web site at 

http://www.gao.gov. 
Page 71 GAO-05-536 Risk Retention Groups

If you or your staff have any questions on this report, please contact me at 

(202) 512-8678 or hillmanr@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this report. GAO staff who made major contributions to this report are 

listed in appendix VI.

Sincerely yours, 

Richard J. Hillman

Managing Director, Financial Markets and 

Community Investment
Page 72 GAO-05-536 Risk Retention Groups

Appendix I

Objectives, Scope, and Methodology ApApenednxidexiIs

Our objectives were to (1) examine the effect risk retention groups (RRG) 

have had on the availability and affordability of commercial liability 

insurance; (2) assess whether any significant regulatory problems have 

resulted from the Liability Risk Retention Act’s (LRRA) partial preemption 

of state insurance laws; and (3) evaluate the sufficiency of LRRA’s 

ownership, control, and governance provisions in protecting the interests 

of RRG insureds. We conducted our review from November 2003 through 

July 2005 in accordance with generally accepted government auditing 

standards. 

Effects on Availability and 

Affordability of Commercial 

Liability Insurance

Overall, we used surveys, interviews, and other methods to determine if 

RRGs have increased the availability and affordability of commercial 

liability insurance. First, we surveyed regulators in all 50 states and the 

District of Columbia. The survey asked regulators to respond to questions 

about regulatory requirements for RRGs domiciled in their state, their 

experiences with RRGs operating in their state, and their opinions about 

the impact of LRRA. We pretested this survey with five state regulators, 

made minor modifications, and conducted data collection during July 2004. 

We e-mailed the survey as a Microsoft Word attachment and received 

completed surveys from the District of Columbia and all the states except 

Maryland. Then, to obtain more specific information about how regulators 

viewed the usefulness of RRGs, we interviewed insurance regulators from 

14 different states that we selected based on several characteristics that 

would capture the range of experiences regulators have had with RRGs. In 

addition, we interviewed representatives from eight RRGs serving different 

business areas and reviewed documentation they provided describing their 

operations and how they served their members.1

 Second, we asked the 

National Association of Insurance Commissioners (NAIC) to calculate the 

overall market share of RRGs in the commercial liability insurance market 

as of the end of 2003. We used 2003 data for all financial analyses because it 

constituted the most complete data set available at the time of our analysis. 

Using its Financial Data Repository, a database containing annual and 

quarterly financial reports and data submitted by most U.S. domestic 

insurers, NAIC compared the total amount of gross premiums written by 

RRGs with the total amount of gross premiums generated by the sale of

1

The business areas were environmental, government and institutions, healthcare, 

manufacturing and commerce, professional services, and property development. 
Appendix I

Objectives, Scope, and Methodology

Page 73 GAO-05-536 Risk Retention Groups

commercial liability insurance by all insurers.2 For the market share 

analysis, as well as for our analysis of gross premiums written by RRGs, we 

only included the 115 RRGs that wrote premiums during 2003. NAIC 

officials reported that while they perform their own consistency checks on 

this data, state regulators were responsible for validating the accuracy and 

reliability of the data for insurance companies domiciled in their state. We 

conducted tests for missing data, outliers, and consistency of trends in 

reporting and we found these data to be sufficiently reliable for the 

purposes of this report. Third, to determine the number of RRGs that states 

have chartered since 1981, we obtained data from NAIC that documented 

the incorporation and commencement of business dates for each RRG and 

identified the operating status of each RRG—for example, whether it was 

actively selling insurance or had voluntarily dissolved. Finally, to determine 

which business sectors RRGs were serving and the total amount of gross 

premiums written in each sector, we obtained information from a trade 

journal—the Risk Retention Reporter—because NAIC does not collect this 

information by business sector. 

Failure Analysis We also requested that NAIC analyze their annual reporting data to 

calculate the “failure” rate for RRGs and compare it with that of traditional 

property and casualty insurance companies from 1987 through 2003. In 

response, NAIC calculated annual “failure” rates for each type of insurer, 

comparing the number of insurers that “failed” each year with the total 

number of active insurers that year. The analysis began with calendar year 

1987 because it was the first full year following the passage of LRRA. NAIC 

classified an insurance company as having failed if a state regulator 

reported to NAIC that the state had placed the insurer in a receivership for 

the purpose of conserving, rehabilitating, or liquidating the insurance

2

Gross premiums are the total direct premiums written by the insurer and assumed by other 

carriers. 
Appendix I

Objectives, Scope, and Methodology

Page 74 GAO-05-536 Risk Retention Groups

company.3 Since NAIC officials classified an insurance company subject to 

any one of these actions as having failed, the failure date for each insurance 

company reflects the date on which a state first took regulatory action. We 

independently verified the status of each RRG that NAIC classified as failed 

by cross-checking the current status of each RRG with information from 

two additional sources— state insurance departments’ responses to our 

survey, with follow-up interviews as necessary, and the Risk Retention 

Group Directory and Guide.

4

 To determine if the differences in annual 

failure rates of the RRGs and traditional companies were statistically 

significant, NAIC performed a paired T-test. They concluded that the 

average annual RRG failure rates were higher than those for traditional 

property and casualty insurers.5

 We also obtained a similar statistically 

significant result when testing for the difference across the 18-year period 

for RRGs and traditional insurers active in a given year. We recognize that, 

although these tests indicated statistically significantly different failure 

rates, the comparison between these insurer groups is less than optimal 

because the comparison group included all property and casualty insurers, 

which do not constitute a true “peer group” for RRGs. First, RRGs are only 

permitted to write commercial liability insurance, but NAIC estimated that

3

Conservation, rehabilitation, and liquidation are regulatory actions a state insurance 

commissioner can take in response to concerns about the condition of an insurance 

company. A state places an insurance company in conservation when the management is 

deemed unable to administer the company in a proper fashion, usually because of concerns 

about insolvency. The scope of conservation under current state law can vary from seizure 

of certain assets to the supervision of an insurer’s operations, with or without a court order, 

and could include an order of rehabilitation. Rehabilitation generally involves the transfer of 

all operational authority from an insurer’s management to a receiver with the objective of 

initiating a rehabilitation plan to return the company to sound financial and operational 

condition. An insurance company not deemed susceptible to a successful conservation or 

rehabilitation may be placed in liquidation. The liquidation process ordinarily would include 

the seizure, marshalling, and liquidation of the company’s assets, a determination of the 

company’s liabilities, and the distribution of the assets of the insurance company to 

claimants with approved claims. Each time states take one of these, or other, regulatory 

actions, they are supposed to notify NAIC of these actions so NAIC can store this 

information in its Financial Data Repository. 

4

Risk Retention Group Directory and Guide, ed. Karen Cutts, J.D. (Insurance 

Communications, Pasadena Calif.: 2004). 

5

A paired T-test is used to make multiple paired comparisons (in the same or many 

subjects), over a number of years, to determine if the average difference between these 

paired comparisons is larger than would be expected by chance.
Appendix I

Objectives, Scope, and Methodology

Page 75 GAO-05-536 Risk Retention Groups

only 34 percent of insurers exclusively wrote liability insurance.6 Further, 

NAIC’s peer group included traditional insurers writing both commercial 

and personal insurance. Second, we noted that the paired T-test 

comparison is more sensitive to any single RRG failing than any failure of a 

traditional insurer because of the relatively small number of RRGs. Finally, 

most RRGs are substantially smaller in size (that is, in terms of premiums 

written) than many insurance companies and may have different 

characteristics than larger insurance companies. Given the data available 

to NAIC, it would have been a difficult and time-consuming task to 

individually identify and separate those property and casualty insurers with 

similar profiles for comparison with RRGs. 

Selection of Regulators for 

Interviews

In choosing which regulators to interview, we first selected regulators from 

the six states that had domiciled the highest number of active RRGs as of 

June 30, 2004, including two with extensive regulatory experience and four 

new to chartering RRGs. The six leading domiciliary states were Arizona, 

the District of Columbia, Hawaii, Nevada, South Carolina, and Vermont. 

Second, we selected regulators from eight additional states, including four 

that had domiciled just a few RRGs and four that had domiciled no RRGs. 

For states that had domiciled just a few or no RRGs, we identified and 

selected those where RRGs, as of the end of 2003, were selling some of the 

highest amounts of insurance. Finally, we also considered geographic 

dispersion in selecting states across the United States. In total, we selected 

14 regulators (see table 1 for additional information). 

6

According to NAIC, estimates based on its analysis of 2004 filings indicate that 9 percent of 

insurers wrote only property lines of insurance, 34 percent wrote only liability lines of 

insurance, 9 percent wrote neither property or liability insurance, and 48 percent wrote 

either property or liability insurance combined with another line of insurance (for example, 

property and liability). NAIC explained that its conducting such an analysis for each year 

included in the failure analysis would be both time-intensive and complex—for example, 

because companies sometimes changes the lines of business they write from year to year. 
Appendix I

Objectives, Scope, and Methodology

Page 76 GAO-05-536 Risk Retention Groups

Table 1: Characteristics of States We Interviewed, Based on Years of Regulatory Experience and Number of RRGs Domiciled

Source: NAIC.

a

In the “Amount of Insurance Written” column, we use N/A to mean “not applicable” because we did not 

use “amount of insurance written in each state” as a criterion for selecting states that had domiciled the 

highest amount of RRGs. “Amount of insurance written” is based on direct written premiums as of 

December 31, 2003, the most recent annual data available at the time we selected states for interview. 

In the “Year First RRG Was Formed” column, we used N/A to mean “not applicable” because the four 

states had not domiciled any RRGs. 

b

Arizona chartered three RRGs between 1987 and 1989, but they dissolved by 1995. Arizona began 

chartering RRGs under its captive law in 2003. 

c

Florida, Illinois, Texas, and Tennessee had chartered other RRGs in the past, although each state had 

only one active as of mid-2004. According to NAIC’s data, California, New York, and Ohio never 

chartered an RRG. 

Effects of Partial 

Preemption of State 

Insurance Laws

To determine if any significant regulatory problems have resulted from 

LRRA’s partial preemption of state insurance laws, as part of our survey we 

asked regulators to evaluate the adequacy of LRRA’s protections, describe 

how they reviewed RRG financial reports, and report whether their state 

had ever asked a domciliary state to conduct an examination. To obtain an 

in-depth understanding of how state regulators viewed the adequacy of 

LRRA’s regulatory protections and identify specific problems, if any, we 

interviewed regulators from each of our selected 14 states. We made visits 

Characteristics of states State

Number of active

domiciled RRGs, as of

June 30, 2004

Year first RRG was 

formed

Amount of insurance 

written by RRGs in the 

state, as of Dec. 31, 2003

High number of RRGs and 

years of experience 

domiciling RRGs

Vermont 63 1987 N/Aa

Hawaii 17 1988 N/A

High number of RRGs and 

new to domiciling RRGs

South Carolina 36 2001 N/A

District of Columbia 12 2003 N/A

Nevada 8 2001 N/A

Arizona 6 2003 (for RRGs formed 

under captive law)b

N/A

Limited number of 

domiciled RRGsc

Florida 1 1987 $46 million

Illinois 1 1980 $74 million

Texas 1 1984 $87 million

Tennessee 1 1987 $38 million

No RRGs domiciled California 0 N/Aa $156 million

New York 0 N/A $206 million

Ohio 0 N/A $45 million

Pennsylvania 0 N/A $238 million
Appendix I

Objectives, Scope, and Methodology

Page 77 GAO-05-536 Risk Retention Groups

to the insurance departments of five of the six leading domiciliary states—

Arizona, the District of Columbia, Hawaii, South Carolina, and Vermont—

and five additional states—Nebraska, New York, Tennessee, Texas, and 

Virginia. To assess the regulatory framework for regulating RRGs in the six 

leading domiciliary states (the five we visited plus Nevada), we also 

reviewed state statutes and obtained from regulators detailed descriptions 

of their departments’ practices for chartering and regulating RRGs. To 

determine how the RRG regulatory framework created in these states 

compared with that of traditional insurers, we identified key components 

of NAIC’s accreditation program for traditional insurance companies, 

based on documentation provided by NAIC and our past reports. Finally, 

our survey also included questions about RRGs consisting of businesses 

that issued vehicle service contracts (VSC) to consumers because this type 

of arrangement is associated with two failed RRGs. 

In reviewing how RRGs file financial reports, we assessed how the use or 

modification of two sets of accounting standards, generally accepted 

accounting principles (GAAP) and statutory accounting principles (SAP), 

could affect the ability of NAIC and regulators to analyze the reports. For 

the year 2003, we also obtained from NAIC the names of RRGs that used 

GAAP to file their financial reports and those that used SAP. To obtain an 

understanding of differences between these accounting principles, we 

obtained documentation from NAIC that identified key differences and 

specific examples of how each could affect an RRG’s balance sheet. We 

relied on NAIC for explanations of SAP because NAIC sets standards for 

the use of this accounting method as part of its accreditation program. The 

purpose of the accreditation program is to make monitoring and regulating 

the solvency of multistate insurance companies more effective by ensuring 

that states adhere to basic recommended practices for an effective state 

regulatory department. Specifically, NAIC developed the Accounting 

Practices and Procedures Manual, a comprehensive guide on SAP, for 

insurance departments, insurers, and auditors to use. To better understand 

GAAP and its requirements, we reviewed concept statements from the 

Financial Accounting Standards Board (FASB), which is the designated 

private-sector organization that establishes standards for financial 

accounting and reporting. We also consulted with our accounting experts 

to better understand how GAAP affected the presentation of financial 

results. 
Appendix I

Objectives, Scope, and Methodology

Page 78 GAO-05-536 Risk Retention Groups

Sufficiency of LRRA 

Provisions in Protecting 

RRG Insureds

To determine if LRRA’s ownership, control, and governance requirements 

adequately protect the interests of RRG insureds, we analyzed the statute 

to identify provisions relevant to these issues. In addition, we reviewed the 

insurance statutes of the six leading domiciliary states—Arizona, the 

District of Columbia, Hawaii, Nevada, South Carolina, and Vermont—

related to the chartering of RRGs to determine if those states imposed any 

statutory requirements on RRGs with respect to ownership, control, or 

governance of RRGs. To identify additional expectations that state 

insurance departments might have set for the ownership, control, or 

governance of RRGs, we interviewed regulators from the six leading 

domiciliary states and reviewed the chartering documents, such as articles 

of incorporation and bylaws, of RRGs recently chartered in five of those 

states. One state insurance department, South Carolina, would not provide 

us access to these documents although we were able to obtain articles of 

incorporation from the Office of the South Carolina Secretary of State. In 

addition, we looked at past failures (and the public documentation that 

accompanies failures) to assess whether factors related to the ownership, 

control, and governance of RRGs played a role, or were alleged to have 

played a role, in the failures, particularly with respect to inherent conflicts 

of interest between the RRG and its management company or managers. To 

identify these factors, we first selected 16 of the 22 failures to review, 

choosing the more recent failures from a variety of states. As available for 

each failure, we reviewed relevant documentation, such as examination 

reports, liquidation petitions and orders, court filings (for example, 

judgments, if relevant), and interviewed knowledgeable state officials. 

Because some of the failures were more than 5 years old, the amount of 

information we could collect about a few of the failures was more limited 

than for others. In the case of National Warranty RRG, we reviewed 

publicly available information as supplied by the liquidator of National 

Warranty on its Web site; we also interviewed insurance regulators in 

Nebraska where National Warranty’s offices were located and reviewed 

court documents. We used these alternative methods of obtaining 

information because National Warranty RRG’s liquidators would not supply 

us any additional information. To determine how frequently RRGs include 

the lack of guaranty fund disclosure on their Web sites and if they use the 

words “risk retention group” in their name, we searched the Internet to 

identify how many RRGs had Web sites as of August 2004, based on a listing 

of 160 RRGs NAIC identified as active as of the beginning of June 2004. 

When we identified Web sites, we noted whether the words “risk retention 

group” or the acronym “RRG” appeared in the RRG’s name and reviewed 

the entire site for the lack of guaranty fund disclosure. We updated the 

results of our initial search in May 2005, using the original group of RRGs. 
Page 79 GAO-05-536 Risk Retention Groups

Appendix II

Survey of State Regulators on Risk Retention 

Groups ApendxiI

1

Introduction 

The Liability Risk Retention Act of 1986 permits risk retention groups (RRGs) to offer 

most types of commercial liability insurance. RRGs are unique because unlike most 

insurance companies, they are regulated only by the state that chartered them and are 

largely exempt from the oversight of the states in which they operate. At the request of 

Chairman Michael G. Oxley, Chairman of House Financial Services, we are conducting a 

review of RRGs to determine how they have met the insurance needs of businesses and 

whether the exemption of RRGs from most state regulations, other than those of the 

state in which they are domiciled, has resulted in any regulatory concerns. 

We believe that you can make an important contribution to this study, and ask that you 

respond to this survey so we can provide the most complete information about RRGs to 

Congress. The survey should take about 90 minutes to complete, although additional 

time may be required if your state has chartered several RRGs. Please note that 

attached to the e-mail that transmitted this survey is a file that identifies all the RRGs 

operating in your state, as of year-end 2003. You will need to review this list in order to 

answer questions 23 and 24. 

As indicated in the survey, we would like you to provide us information about insurance 

statutes and regulations that apply to RRGs chartered in your state. For the regulations 

only, we are requesting that you provide a hyperlink to the regulation, but you are also 

welcome to send us a copy of the regulation attached to the e-mail message that contains 

your completed survey instrument. Please complete the survey in MS-Word and return it 

via e-mail to GAOrrgSurvey@gao.gov -- no later than July 23, 2004. 

If you have any questions about the content of this questionnaire, please contact: 

Matthew Poynton, Analyst/Intern Sonja Bensen, Senior Analyst 

e-mail: poyntonm@gao.gov e-mail: bensens@gao.gov

Phone: (202) 512-6099 Phone: (202) 512-9806 

If you encounter any technical difficulties please contact:

William R. Chatlos 

Phone: (202) 512-7607 

e-mail: chatlosw@gao.gov

NOTE: The number of states responding to an item is generally printed left of the 

response. No responses are provided in this Appendix when the answers are too 

diverse to summarize or present briefly. 
Appendix II

Survey of State Regulators on Risk Retention 

Groups

Page 80 GAO-05-536 Risk Retention Groups

2

Definitions of acronyms and terms used in this questionnaire 

Risk Retention Group (RRG): An RRG is a group of members with similar risks that 

join to create an insurance company to self-insure 

their risks. The Liability Risk Retention Act permits 

RRGs to provide commercial liability insurance and 

largely exempts them from regulatory oversight other 

than that performed by their chartering state.

State of Domicile: The state that charters an RRG and is responsible for 

performing regulatory oversight, including 

examinations. (“State” includes the District of 

Columbia, and for RRGs chartered before 1985, 

Bermuda and the Cayman Islands.) 

Host state: Any state in which an RRG operates but is not

chartered.

Vehicle Service Contract: A vehicle service contract, purchased by consumers 

 when they buy cars, is for maintaining and 

 repairing an automobile beyond its manufacturer's 

 warranty coverage. 

INSTRUCTIONS:

1. Please use your mouse to navigate throughout the survey by clicking on the field 

or check box you wish to answer or filling in the requested field [ ]. 

 2. To select a check box, simply click or double click on the center of the box.

3. To change or deselect a response, simply click on the check box and the ‘X’ 

should disappear. 

4. Consult with others as needed to complete any section. 

5. After each section, there is a place for you to make comments. 

Part I: Contact Information About the Person Completing the Survey 

1. What is the name of your State Insurance Commissioner? 

49 of 50 State Commissioners; plus Washington, DC responded 

2. Please provide the name, title, phone number, and email address of the person completing the 

survey so we might contact them if there are questions. 

Name: [ ] Title: [ ] 

Phone: [ ] E-Mail: [ ] 
Appendix II

Survey of State Regulators on Risk Retention 

Groups

Page 81 GAO-05-536 Risk Retention Groups

3

Part II: Requirements for Domiciling RRGs in Your State 

3. In your state, under which of the following domiciliary laws and/or regulations would RRGs 

be chartered, if domiciled and chartered in your state? (Check all that apply.) 

45 Traditional insurance law and/or regulations 

16 Captive law and/or regulations; with or without specific provisions for RRGs 

 7 Other (Specify): [ ]

4. If your state has a captive law and/or regulations, please provide the following information: 

27 Not applicable, we do not use a captive law and/or regulations (Skip to Question #5.) 

a. Year captive law enacted: [ ] 

b. Year regulations created: [ ] 

c. Citation for Statute: [ ] 

 d. Citation for regulations (Please include website link below.)

 website link: [ ] 

e. Does this law/regulation permit RRGs to be chartered as a captive?. 

 No Yes

5. If your state uses its traditional insurance law to charter RRGs, please provide the following 

information: 

4 Not applicable, we do not use traditional laws and/or regulations to charter RRGs. 

(Skip to Question #6.) 

a. Citation for statute under which RRGs are chartered: [ ] 

 b. Citation for regulations (Please include website link below.) 

 website link: [ ] 

In Part II (Questions 3-12), we are asking about the role of your state as a 

“domiciliary” state for RRGs, the state responsible for chartering and regulating an 

RRG. This information is important, even if your state has not actually chartered 

an RRG, because the laws and regulations for domiciling RRGs vary from state to 

state. In contrast, Section III contains questions pertaining to RRGs operating but 

not domiciled in your state. 

In addition, in some states RRGs can be chartered under more than one set of 

laws. When responding to the questions below, please respond for each law under 

which a RRG could be chartered, even if a RRG or you the regulator would prefer 

a RRG be chartered under one law (e.g., a captive law) rather than another (e.g., 

traditional insurance company law).
Appendix II

Survey of State Regulators on Risk Retention 

Groups

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6. In your state, what are the minimum initial capital and/or surplus requirements for a RRG 

domiciled in your state under any of the following laws/regulations that are applicable? 

7. In your state, under which of the following laws and/or regulations would RRGs domiciled in 

your state be required to comply with the National Association of Insurance Commissioners’ 

(NAIC) risk-based capital requirements? 

8. In your state, under which of the following laws and/or regulations would RRGs domiciled in 

your state be required to submit the same financial information as traditional insurance 

companies to the NAIC?

*If you indicated that your state does not require RRGs to file financial information with NAIC, 

please explain: [ ]

Type of Law/Regulation 

Not Applicable 

(RRGs Cannot Be Chartered 

Under These Statutes or 

Regulations in this State) 

Minimum Initial Capital and/or 

Surplus Requirements 

Applicable to RRGs 

a. Traditional Insurance Laws/Regs 3 $[ ] 

b. Captive Insurance Laws/Regs 21 $[ ] 

c. Other (Specify): [ ]

19 $[ ] 

Type of Law/Regulation

Not Applicable 

(RRGs Cannot Be 

Chartered Under These 

Statutes or Regulations in 

this State)

Yes No 

a. Traditional Insurance Laws/Regs 3 44 2 

b. Captive Insurance Laws/Regs 19 7 12 

c. Other (Specify): [ ]

19 3 2 

Type of Law/Regulation

Not Applicable 

(RRGs Cannot Be 

Chartered Under These 

Statutes or Regulations in 

this State)

Yes No* 

a. Traditional Insurance Laws/Regs 3 45 0 

b. Captive Insurance Laws/Regs 20 14 4 

c. Other (Specify): [ ]

20 4 0
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9. How many RRGs have ever domiciled in your state?

 Number of domiciled RRGs: [ ] (If this number is greater than “0”, please 

 complete Appendix A.) 

26 = 0 RRGs 

17 = 1 – 5 RRGs 

 7 = 6+ RRGs 

10. Does your state have staff who are exclusively dedicated to overseeing matters related to 

captives and/or RRGs domiciled in your state? 

42 No (Skip to Q12.) 

 7 Yes 

11. If you answered “Yes” to Question 10, about how many full-time-equivalent (FTE) staff are 

currently dedicated to working with captives and RRGs domiciled in your state? 

Total number of FTEs working with captives and RRGs: [ ] 

12. If you have any comments related to this section, please write them here: [ ]

Part III: Your Role as a Host State Regulator For RRGs Operating in Your State 

But Domiciled in Another State 

A. Submission of Operational Plans or Feasibility Studies to Host State Regulators 

The Liability Risk Retention Act, 15 U.S.C. §3902, requires that each RRG submit 

to the insurance commissioner of each state in which it intends to do business, a

copy of a plan of operation or a feasibility study which includes the coverages, 

deductibles, coverage limits, rates and rating classification systems for each line of

insurance the group intends to offer, and a copy of any revisions to such plan or 

study.

In Part III (Questions 13–24), we are asking about the role of your state as a “host state” 

regulator. A host state is one in which RRGs operate but are not domiciled. The 1986 

Liability Risk Retention Act limits the amount of oversight that “host state” regulators 

can perform over RRGs operating but not domiciled in their states. This section 

pertains only to requirements for RRGs operating but not domiciled in your state.
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13. As of year-end 2003, how many RRGs were registered with your state to conduct 

business? 

Number of registered RRGs: [ ] 1 = 1 - 20 RRGs 

 7 = 21- 40 RRGs 

32 = 41- 60 RRGs 

 8 = 61- 80 RRGs 

 1 = >81 RRGs 

14. What steps, if any, does your state routinely take to ensure that RRGs submit plans of 

operation or feasibility studies?

7 None; No steps are routinely taken 

 The following steps are routinely taken (Describe): [ ]

15. To the best of your knowledge and before you completed Appendix A, has any RRG that has 

ever operated in your state failed to provide copies of its plans of operation or feasibility studies 

before it started to do business in your state?

41 No

9 Yes (Please explain): [ ]

16. Are you aware of any RRG that substantially changed its business plan but did not provide 

your state a copy of the altered plan?

46 No 

 4 Yes (Please explain): [ ]

17. Since host states have limited authority over RRGs operating, but not domiciled in their 

states; to what extent do you review these plans compared to those of eligible non-admitted 

insurers (i.e., surplus lines insurers)? 

19 Less review than eligible non-admitted insurers 

22 About the same review as other eligible non-admitted insurers 

 7 More review than other eligible non-admitted insurers 

Please briefly describe the review that you conduct: [ ]

18. If you have any comments related to this section, please write them here: [ ]
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B. Submission of Annual Financial Statements to Host State Regulators 

19. What steps, if any, does your state routinely take to ensure that RRGs operating but not 

domiciled in your state submit annual financial statements?

7 None; No steps are routinely taken 

The following steps are routinely taken (Describe): [ ]

20. To the best of your knowledge, has any RRG operating in your state ever failed to provide

copies of its annual financial statement to your state insurance department? 

35 No

15 Yes Æ (If yes, please explain how often): [ ]

21. Since host states have limited authority over RRGs operating in their states, to what extent do 

you review these annual financial statements compared to those of eligibile non-admitted 

insurers (i.e., surplus line insurers)?

22 Less review than eligible non-admitted insurers 

21 About the same review as eligible non-admitted insurers 

 5 More review than eligibile non-admitted insurers 

Please briefly describe the review you conduct: [ ]

22. If you have any comments related to this section, please write them here: [ ]

The Risk Retention Act, 15 U.S.C. §3902, requires that each RRG submit to the 

insurance commissioner of each State in which it is doing business, a copy of the 

group’s annual financial statement submitted to the State in which the group is 

chartered as an insurance company, which statement shall be certified by an 

independent public accountant and contain a statement of opinion on loss and loss 

adjustment expense reserves made by a member of the American Academy of 

Actuaries, or a qualified loss reserve specialist. 
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C. Identification of RRGs Operating in Your State 

23. To the best of your knowledge, were all of the RRGs reporting to NAIC that they wrote 

premiums in your state in 2003, also registered to conduct business in your state in 2003? 

36 Yes 

10 No -- If “No”, please indicate: 

 The names of RRGs that wrote premiums in your state but were not 

 registered in your state: [ ]

 

 3 Not sure -- Some RRGs may have written premiums in our state without first 

 registering with our department but we are double-checking 

 NAIC’s information directly with the RRGs in question. (Request: 

 Please let GAO know if you identify RRGs that operated but were 

 not registered in your state in 2003, even if you have already 

 submitted your survey.) 

24. Based on a review of your internal records, did you identify any RRGs that wrote premiums 

in your state in 2003 but were not listed on NAIC’s list? 

30 No 

10 Yes -- If “Yes”, please indicate: 

 The names of RRGs that wrote premiums in your state in 2003 but were not 

 included on NAIC’s list as writing premiums in your state in 2003: 

 8 do not know—our state does not track whether registered RRGs wrote 

 premiums in our state. 

 

INSTRUCTIONS: The e-mail inviting you to respond to this survey contained two 

attachments: (1) the survey itself, including Appendix A and (2) Appendix B--a list 

of all RRGs that reported financial data to NAIC for 2003. The RRGs appearing 

first in Appendix B identified themselves to NAIC as writing premiums in your state 

during 2003 and those appearing second did not. To respond to the questions below, 

please compare the list of RRGs in Appendix B that reported to NAIC that they wrote 

premiums in your state in 2003 with your internal records. 
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9

Part IV: Regulatory Experiences and Opinions on the Risk Retention Act 

INSTRUCTIONS: If your state has never chartered RRGs, go to Question 29. 

 Otherwise, please begin with Question 25. 

25. During the past 24 months, about how many states that host RRGs have contacted your state

to seek information about RRGs domiciled in your state? 

 Number of States contacting you: [ ] 19 = 0 contacts 

 6 = 1-5 contacts 

 3 = >6 contacts 

26. To the best of your knowledge, has your state ever been asked by a host state regulator to 

conduct an examination of an RRG domiciled in your state?

29 No (Skip to Q29)

 1 Yes

27. Please identify below all requests made of your state to conduct an examination of an RRG 

domiciled in your state, including the name of the RRG, the date of the request, and a brief 

explanation of the circumstances. 

Name of RRG Date of Request Explanation of Circumstances 

[ ] [ ] [ ] 

[ ] [ ] [ ] 

28. Did your state comply with the host state’s request in every case? 

1 Yes 

1 No (Please explain why you did not comply): [ ]

29. During the past 24 months, have concerns about an RRG led your department to contact the 

RRG’s domiciliary state regulators? 

28 No 

22 Yes If yes, how many different RRGs have you called about (excluding 

 calls about National Warranty RRG)? [ ] 

30. To the best of your knowledge, as a host state for RRGs, has your state ever asked a 

domiciliary state to conduct an examination? 

45 No (Skip to Q33.) 

 5 Yes
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31. Please identify each request your state has made, including the name of the RRG, the date of 

request, the domiciliary state to which you made the request, and a brief explanation of the 

circumstances. 

Name of RRG Date of 

Request

Domiciliary 

State 

Explanation of Circumstances 

[ ] [ ] [ ] [ ] 

[ ] [ ] [ ] [ ] 

32. Did the domiciliary state comply with your state’s request(s)? 

2 Yes

2 No (Please provide further explanation): [ ]

2 Do not know 

33. Do you have any additional comments on questions 25 through 32? [ ]

34. For the record, does your State believe RRGs have expanded the availability and 

affordability of commercial liability insurance for groups that would otherwise have had 

difficulty in obtaining coverage? 

33 Yes 

 3 No

12 No Opinion 

Please offer any comments on your response: [ ]

35. For the record, what is your State’s opinion as to whether the Risk Retention Act should be 

expanded to permit RRGs to provide property insurance?

31 No, the Act should not be expanded 

 8 Yes, the Act should be expanded 

10 No opinion 

Please offer any comments on your response: [ ]
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36. In your opinion, how adequate or inadequate are the regulatory protections or safeguards 

built into the Risk Retention Act? (Check one.) 

 0 Very adequate

 8 Adequate

 6 Neither adequate nor inadequate 

19 Inadequate

 9 Very inadequate

 7 No opinion or don’t know 

Please offer any comments on your response: [ ]

37. Does your state have an opinion as to whether the Risk Retention Act should be clarified or 

amended in any way? 

21 No opinion 

 1 No Æ If “No”, please explain your response: [ ]

27 Yes Æ If “Yes”, please describe the desired changes: [ ]

(Continue on next page.)
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Part IV. Regulation of Vehicle Service Contracts 

38. Please provide the name, title, office and phone number of the person who completed this 

part of the survey unless the name is the same as shown in question 2: 

Name: [ ] Title: [ ] 

Office: [ ] Phone: [ ] 

39. Are vehicle service contracts (VSCs) regulated as insurance in your state? 

28 No 

 8 Yes 

13 Yes, but under certain conditions (Specify conditions): 

 Citation for statute: [ ] 

 Citation for regulation: [ ] website link: [ ] 

40. Has your state adopted the NAIC Service Contracts model law? 

35 No 

11 Somewhat – please explain: [ ] 

 4 Yes 

41. Does your state permit third-party administrators, rather then just auto dealers, to issue 

VSCs? 

 7 No 

38 Yes

 Citation for statute/regulation: [ ] 

Part IV (Questions 38-48) is about vehicle service contracts (VSCs). An increasing number of 

risk retention groups have been established to insure VSC obligors. These obligors—whether 

auto dealers or third party administrators—issue VSCs to consumers. Because of this trend, and 

the recent failure of National Warranty RRG, we are seeking a limited amount of information on 

how states regulate insurance companies that insure obligors who issue VSCs. 

INSTRUCTIONS: Please complete Questions 38 to 47. If VSCs are regulated in another 

office, please ask for assistance. If someone other than the person identified in question 2 

answered these questions, please provide the appropriate contact information. 
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42. Do any of your state agencies license obligors—whether auto dealers or third-party 

administrators—before obligors can issue vehicle service contracts in your state? 

25 No 

21 Yes

 Name of the state agency: [ ] 

43. Which of the following requirements, if any, does your state require of obligors 

before they issue VSCs in your state? (Check all that apply.)

28 Insure VSCs under a reimbursement or other insurance policy 

13 Maintain a funded reserve account for its obligations 

16 Place in trust with the commissioner a financial security deposit (e.g., a surety bond) 

13 Maintain a net worth of $100 million or another amount: 

 (If checked, identify amount: [ ])

18 Other, please describe [ ]

44. If obligors in your state purchase insurance for their VSCs, does your state require that in the 

event the obligor fails to perform, the insurer issuing the policy must either pay on behalf of the 

obligor any sums the obligor is legally obligated to pay, or provide any service which the obligor 

is legally obligated to provide? 

19 No (Skip to Question 46) 

23 Yes

 4 Yes, but under certain conditions 

 Citation for statute/regulation: [ ] 

45. If you answered “yes” to question 44, does that mean that the insurer is required to pay 100 

percent of the loss (i.e., first dollar coverage) or does the insurer’s risk not attach until some 

deductible amount is met, such as a loss in excess of the obligor’s reserves? 

 2 No

18 Yes

 4 Yes, but under certain conditions 

 Please explain: [ ]
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46. Does your state require that in the event an obligor fails to pay or provide service on a VSC 

claim within a certain number of days (e.g., 60) after proof of loss has been filed, the contract 

holder is entitled to make a claim directly against the insurance company? 

27 No 

17 Yes

 2 Yes, but under certain conditions 

Citation for statute/regulation: [ ] 

47. Are VSCs covered by your guarantee fund? 

43 No 

 1 Yes

 2 Yes, but under certain conditions 

Citation for statute/regulation: [ ] 

48. If you have any other comments about RRGs, or other insurance companies, insuring vehicle 

service contracts, please provide them here: [ ]

Have you completed Appendix A and/or Appendix B? 

(Please save this document as an MSWord document, 

then attach it to an email and send it to GAOrrgSurvey@gao.gov)

Thank you for your assistance. 
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Appendix A: Identification of RRGs Domiciled in Your State 

For each RRG that your state has chartered since 1981, please provide the following information: 

(Duplicate the table as many times as needed to complete for all RRG domiciled in your state.)

Note: You may also choose to send this information as a separate attachment. 

Name of RRG Date of 

Charter 

Date

Started 

Business 

Type of Insured 

Business 

NAIC 

Status 

Code 

(See 

below) 

If INACTIVE, 

Date Stopped 

Business 

[ ] [ ] [ ] 

[ ] [ ] [ ] 

[ ] [ ] [ ] 

[ ] [ ] [ ] 

[ ] [ ] [ ] 

[ ] [ ] [ ] 

[ ] [ ] [ ] 

[ ] [ ] [ ] 

[ ] [ ] [ ] 

NAIC Status codes: 

1—Active—No regulatory action in process 

2Not Used

3—Inactive-Merged or combined into another company 

4—In rehabilitation, permanent or temporary receivership 

5—Voluntarily out of business 

6—Being liquidated or has been liquidated 

7—Inactive—Estate has closed 

8—Inactive—Charter is inactive 
Page 94 GAO-05-536 Risk Retention Groups

Appendix III

Selected Differences between Statutory and 

Generally Accepted Accounting Principles as 

They Relate to Financial Reporting for RRGs ApendxiI

On an annual basis, traditional insurance companies, as well as risk 

retention groups (RRG), file various financial data, such as financial 

statements and actuarial opinions, with their respective state regulatory 

agencies and the National Association of Insurance Commissioners 

(NAIC). More specifically, RRGs—although subject to the regulation of one 

state (their domiciliary state)—can and do sell insurance in multiple states 

and are required to provide their financial statements to each state in which 

they sell insurance. Unless exempted by the state of domicile, RRGs 

generally file their financial statements with NAIC as well. Additionally, 

although insurance companies generally are required to file their financial 

statements based on statutory accounting principles (SAP), captive 

insurance companies (a category that in many states includes RRGs) are 

generally permitted, and in some cases required, to use generally accepted 

accounting principles (GAAP), the accounting and reporting principles 

generally used by private-sector (nongovernmental) entities.1

 Thus, while 

some RRGs report their financial information using SAP, others report 

using GAAP or variations of GAAP and SAP. 

However, the use or modification of two different sets of accounting 

principles can lead to different interpretations of an RRG’s financial 

condition. For example, differences in the GAAP or SAP treatment of 

assets and acquisition costs can significantly change the reported levels of 

total assets, capital, and surplus. Because regulators, particularly those in 

nondomiciliary states, predicate their review and analysis of insurance 

companies’ financial statements on SAP reporting, the differing accounting 

methods that RRGs may use could complicate analyses of their financial 

condition. For instance, based on whatever accounting basis is filed with 

them, the different levels of surplus reported under GAAP, or SAP, or 

modifications of each, can change radically the ratios NAIC uses to analyze 

the financial condition of insurers—undercutting the usefulness of the 

analyses. Similarly, the accounting differences also affect calculations for 

NAIC’s risk-based capital standards and may produce significantly different 

results. For example, an RRG could appear to have maintained capital 

adequacy under GAAP but would require regulatory action or control if the 

calculations were based on SAP. 

1

Captive insurance companies are companies that are formed and owned by a single 

company or association to self-insure the risks of the parent organization. According to 

NAIC, 79 of the 115 RRGs active as of the end of 2003 filed financial statements using GAAP 

while the others filed using SAP.
Appendix III

Selected Differences between Statutory and 

Generally Accepted Accounting Principles as 

They Relate to Financial Reporting for RRGs

Page 95 GAO-05-536 Risk Retention Groups

Differences in Accounting 

Principles Produce 

Different Financial 

Statements

Differences in the two sets of accounting principles reflect the different 

purposes for which each was developed and may produce different 

financial pictures of the same entity. GAAP (for nongovernmental entities) 

provides guidance that businesses follow in preparing their general 

purpose financial statements, which provide users such as investors and 

creditors with a variety of useful information for assessing a business’s 

financial performance. GAAP stresses measurement of a business’s 

earnings from period to period and the matching of revenue and expenses 

to the periods in which they are incurred. In addition, these financial 

statements provide information to help investors, creditors, and others to 

assess the amounts, timing, and uncertainty of future earnings from the 

business. SAP is designed to meet the needs of insurance regulators, who 

are the primary users of insurers’ financial statements, and stresses the 

measurement of an insurer’s ability to pay claims—to protect policyholders 

from an insurer becoming insolvent (that is, not having sufficient financial 

resources to pay claims).2

 

Additionally, while RRGs may be permitted to report their financial 

condition using either GAAP or SAP, some regulators permit RRGs to 

report using nonstandard variants of both sets of accounting principles—to 

which we refer as modified GAAP and modified SAP. The use of variants 

further constrains the ability of NAIC and nondomiciliary state analysts to 

(1) understand the financial condition of the RRGs selling insurance to 

citizens of their state and (2) compare the financial condition of RRGs with 

that of traditional insurers writing similar lines of insurance. In some cases, 

RRGs are permitted to count letters of credit (LOC) as assets as a matter of 

permitted practice under modified versions of GAAP and SAP,

2

Each state conducts financial oversight of the companies operating in its jurisdictions to 

help ensure that policyholders and claimants receive the requisite benefits from the policies 

sold. In recognition of these special concerns and responsibilities, statutes, regulations, and 

practices combine to establish statutory accounting principles. Statutory accounting 

principles have historically been those practices or procedures prescribed or permitted by 

an insurer’s domiciliary state. NAIC has standardized and incorporated these principles in 

its Accounting Practices and Procedures manuals (which provide a comprehensive guide of 

statutory principles), Annual Statement Instructions, and Financial Condition 

Examiners Handbook.
Appendix III

Selected Differences between Statutory and 

Generally Accepted Accounting Principles as 

They Relate to Financial Reporting for RRGs

Page 96 GAO-05-536 Risk Retention Groups

although neither accounting method traditionally permits this practice.3 

Further, regulators in some states have allowed RRGs filing under GAAP to 

modify their financial statements and count surplus notes as assets and add 

to surplus, another practice which GAAP typically does not allow.4

According to NAIC, the key differences between GAAP and SAP as they 

relate to financial reporting of RRGs are the treatment of acquisition costs 

and assets, differences that affect the total amount of surplus an RRG 

reports on the balance sheet. This is important because surplus represents 

the amount of assets over and above liabilities available for an insurer to 

meet future obligations to its policyholders. Consequently, the 

interpretation of an RRG’s financial condition can vary based on the set of 

accounting principles used to produce the RRG’s balance sheet. 

Acquisition Costs According to NAIC, GAAP and SAP differ most in their treatment of 

acquisition costs, which represent expenditures associated with selling 

insurance such as the commissions, state premium taxes, underwriting, 

and issuance costs that an insurer pays to acquire business. Under GAAP, 

firms defer and capitalize these costs as an asset on the balance sheet, then 

report them as expenses over the life of the insurance policies. This 

accounting treatment seeks to match the expenses incurred with the 

related income from policy premiums that will be received over time. 

Under SAP, firms “expense” all acquisition costs in the year they are 

incurred because these expenses do not represent assets that are available 

to pay future policyholder obligations. As illustrated in figure 9, the 

different accounting treatments of acquisition costs have a direct impact on 

the firm’s balance sheet. Under GAAP, a firm would defer acquisition costs 

and have a higher level of assets, capital, and surplus than that same firm 

would have if reporting under SAP. Under SAP, these acquisition costs 

would be fully charged in the period in which they are incurred, thereby 

reducing assets, capital, and surplus.

3

A letter of credit is a financial guaranty issued by a bank or financial institution that permits 

the party to which it is issued to draw funds from the bank if necessary. In the case of RRGs, 

LOCs generally are drawn if a commissioner of insurance needs to take over the RRG and 

use the LOC to pay all outstanding claims.

4

A surplus note is debt that an insurance company owes and that the lender has agreed 

cannot be repaid without regulatory approval.
Appendix III

Selected Differences between Statutory and 

Generally Accepted Accounting Principles as 

They Relate to Financial Reporting for RRGs

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Figure 9: The Effect of Differences in Accounting for Acquisition Costs on Assets, 

Capital, and Surplus, GAAP Compared with SAP 

a

An aggregate write-in is an item that is included in the balance sheet but for which there is no 

preprinted or established line item. 

b

Deferred acquisition costs are a balance sheet item only under GAAP or modified versions of GAAP. 

SAP does not allow for the deferral of acquisition costs.

c

Prepaid expenses are payments made for goods and services in advance of the date they will be 

received. 

Assets GAAP and SAP also treat some assets differently. Under GAAP, assets are 

generally a firm’s property, both tangible and intangible, and claims against 

others that may be applied to cover the firm’s liabilities. SAP uses a more 

restrictive definition of assets, focusing only on assets that are available to 

pay current and future policyholder obligations—key information for 

regulators. As a result, some assets that are included on a GAAP balance 

sheet are excluded or “nonadmitted” under SAP. Examples of nonadmitted 

assets include equipment, furniture, supplies, prepaid expenses (such as 

prepayments on maintenance agreements), and trade names or other 

intangibles. 

Account category

Current

financials

(GAAP) SAP

Cash and invested assets $2,129,981

674

0

0

0

0

318,132

0

Uncollected premiums

Other

Aggregate write-insa

:

 LOCs

 Other

 Fixed and other assets

 Deferred acquisition costsb

 Prepaid expensesc

$2,129,981

674

0

0

0

0

0

0

Total assets 2,448,787 2,130,655

Adjustments

(318,132)

(318,132)

Reserves

Other

Total liabilities

Capital and surplus

Total liabilities and capital and surplus $2,448,787

683,656

1,765,131

1,727,324

37,807

$2,130,655

365,524

1,765,131

1,727,324

37,807

Source: NAIC.
Appendix III

Selected Differences between Statutory and 

Generally Accepted Accounting Principles as 

They Relate to Financial Reporting for RRGs

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Some RRGs also modify GAAP to count undrawn LOCs as assets. More 

specifically, the six leading domiciliary states for RRGs—Arizona, the 

District of Columbia, Hawaii, Nevada, South Carolina, and Vermont—allow 

RRGs to count undrawn LOCs as assets, thus increasing their reported 

assets, capital, and surplus, even though undrawn LOCs are not recognized 

as an asset under GAAP or SAP. For example, in 2002–2003, state 

regulators permitted about one-third of RRGs actively writing insurance to 

count undrawn LOCs as assets and supplement their reported capital.5

 

Figure 10 illustrates the impact of different asset treatments for undrawn 

LOCs. In this example, the RRG had a $1.5 million LOC that was counted as 

an asset under a modified version of GAAP but was not counted as an asset 

under a traditional use of SAP.6

 In addition, the RRG treated $363,750 in 

prepaid expenses as an asset, which it would not be able to do under SAP. 

Under a modified version of GAAP, the RRG’s total assets would be 

$17,914,359 instead of $16,050,609 under a traditional use of SAP, a 

difference of $1,863,750. 

5

According to NAIC data, 37 of 115 RRGs were allowed to admit an LOC as an asset during 

either 2002 or 2003.

6

However, had the RRG used a modified version of SAP, the $1.5 million could have been 

counted as an asset as well. 
Appendix III

Selected Differences between Statutory and 

Generally Accepted Accounting Principles as 

They Relate to Financial Reporting for RRGs

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Figure 10: Impact of Counting an LOC and Prepaid Expenses as Assets on the 

Balance Sheet, Modified GAAP Compared with SAP

a

In some states, RRGs file under SAP, but can admit an LOC as an asset as a matter of permitted 

practice. This example assumes that such permitted practices are not present.

b

An aggregate write-in is an item that is included in the balance sheet but for which there is no 

preprinted or established line item.

c

Deferred acquisition costs are a balance sheet item only under GAAP or modified versions of GAAP. 

SAP does not allow for the deferral of acquisition costs.

d

Prepaid expenses are payments made for goods and services in advance of the date they will be 

received.

Figure 11 illustrates different treatments of acquisition costs and assets, 

using a modified version of GAAP and a traditional version of SAP. In this 

example, under a modified version of GAAP, undrawn LOCs ($2.2 million), 

acquisition costs ($361,238), and prepaid expenses ($15,724) are valued as 

an additional $2,576,962 in assets with a corresponding increase in capital 

and surplus. The overall impact of treating each of these items as assets 

under a modified version of GAAP is significant because the RRG reported 

a total of $2,603,656 in capital and surplus, whereas it would report only 

$26,694 under a traditional use of SAP. Under traditional GAAP, capital and 

(1,500,000)

Account category

Current

financials

(Modified GAAP) SAPa

Cash and invested assets $6,485,210

914,011

946,778

1,500,000

7,704,610

0

0

363,750

Uncollected premiums

Other

Aggregate write-insb:

 LOCs

 Other

 Fixed and other assets

 Deferred acquisition costsc

 Prepaid expensesd

$6,485,210

914,011

946,778

0

7,704,610

0

0

0

Total assets 17,914,359 16,050,609

Adjustments

(363,750)

(1,863,750)

Reserves

Other

Total liabilities

Capital and surplus

Total liabilities and capital and surplus $17,914,359

2,661,398

15,252,961

4,799,971

10,452,990

$16,050,609

797,648

15,252,961

4,799,971

10,452,990

Source: NAIC.
Appendix III

Selected Differences between Statutory and 

Generally Accepted Accounting Principles as 

They Relate to Financial Reporting for RRGs

Page 100 GAO-05-536 Risk Retention Groups

surplus would be reported as $403,656 ($2,603,656 minus the $2,200,000 

undrawn LOC). 

Figure 11: Impact of Counting Acquisition Costs, LOCs, and Prepaid Expenses as 

Assets on the Balance Sheet, Modified GAAP Compared with SAP

a

In some states, RRGs file under SAP, but can admit an LOC as an asset as a matter of permitted 

practice. This example assumes that such permitted practices are not present.

b

An aggregate write-in is an item that is included in the balance sheet but for which there is no 

preprinted or established line item.

c

Deferred acquisition costs are a balance sheet item only under GAAP or modified versions of GAAP. 

SAP does not allow for the deferral of acquisition costs.

d

Prepaid expenses are payments made for goods and services in advance of the date they will be 

received.

(361,238)

(2,200,000)

Account category

Current

financials

(Modified GAAP) SAPa

Cash and invested assets $4,558,039

465,999

409,775

2,200,000

519,233

0

361,238

15,724

Uncollected premiums

Other

Aggregate write-insb:

 LOCs

 Other

 Fixed and other assets

 Deferred acquisition costsc

 Prepaid expensesd

$4,558,039

465,999

409,775

0

519,233

0

0

0

Total assets 8,530,008 5,953,046

Adjustments

(15,724)

(2,576,962)

Reserves

Other

Total liabilities

Capital and surplus

Total liabilities and capital and surplus $8,530,008

2,603,656

5,926,352

2,111,906

3,814,446

$5,953,046

26,694

5,926,352

2,111,906

3,814,446

Source: NAIC.
Appendix III

Selected Differences between Statutory and 

Generally Accepted Accounting Principles as 

They Relate to Financial Reporting for RRGs

Page 101 GAO-05-536 Risk Retention Groups

Additionally, the two accounting principles treat surplus notes differently. 

Although SAP restricts certain assets, it permits (with regulatory approval) 

the admission of surplus notes as a separate component of statutory 

surplus, which GAAP does not. When an insurance company issues a 

surplus note, it is in effect making a promise to repay a loan, but one that 

the lender has agreed cannot be repaid without regulatory approval. Both 

SAP and GAAP recognize the proceeds of the loan as an asset to the extent 

they have been borrowed but not expended (are still available). However, 

since the insurer cannot repay the debt without approval, the regulator 

knows that the proceeds of the loan are available to pay claims, if 

necessary. Thus, under SAP, with its emphasis on the ability of an insurer to 

pay claims, the proceeds are added to capital and surplus rather than 

recognizing a corresponding liability to repay the debt. GAAP, on the other 

hand, requires companies issuing surplus notes to recognize a liability for 

the proceeds of the loan, rather than adding to capital and surplus since the 

insurer still has to repay the debt. However, according to NAIC data, four 

state regulators have allowed RRGs to modify GAAP and report surplus 

notes as part of capital and surplus during either 2002 or 2003. A total of 10 

RRGs between the four states modified GAAP in this manner and were able 

to increase their reported level of capital and surplus.7

 

Other Differences Finally, in addition to the differences between GAAP and SAP already 

discussed, and as they have been modified by RRGs, other differences 

between the two accounting methods include the treatment of investments, 

goodwill (for example, an intangible asset such as a company’s reputation), 

and deferred income taxes. According to NAIC, while these differences 

may affect a company’s financial statement, they generally do not have as 

great an impact as the differences in the treatment of acquisition costs and 

assets.

The Different Results under 

Each Permitted Accounting 

Method Can Affect Analysis 

of an RRG’s Financial 

Condition

Use or modification of GAAP and the modification of SAP can also affect 

the ability of NAIC and regulators to evaluate the financial condition of 

some RRGs. Although subject to the regulation of one state (their 

domiciliary state), RRGs can and do sell insurance in multiple states and 

are required to provide financial statements to each state in which they sell 

insurance. In almost all cases, RRGs also provide financial statements to 

NAIC for analysis and review. 

7

The value of the surplus notes for the 10 RRGs ranged from $25,000 to $3 million.
Appendix III

Selected Differences between Statutory and 

Generally Accepted Accounting Principles as 

They Relate to Financial Reporting for RRGs

Page 102 GAO-05-536 Risk Retention Groups

NAIC uses financial ratios and risk-based capital standards to evaluate the 

financial condition of insurance companies and provides this information 

to state regulators in an effort to help them better target their regulatory 

efforts.8

 NAIC calculates the ratios using the data from the financial 

statements as they are filed by the companies. However, since both the 

formulas and the benchmarks for the financial ratios are based on SAP, the 

ratio information may not be meaningful to NAIC or the state regulators if 

the benchmarks are compared with the ratios derived from financial 

information based on a standard or modified version of GAAP, or a 

modified version of SAP. Further, the use of GAAP, modified GAAP, or 

modified SAP could make risk-based capital standards less meaningful 

because these standards also are based on SAP. (We discuss accounting 

differences in relation to risk-based capital standards in more detail at the 

end of this appendix.) 

To illustrate how the use of two different accounting methods can impede 

an assessment of an RRG’s financial condition, we selected two financial 

ratios that NAIC commonly uses to analyze the financial condition of 

insurers—net premiums written to policyholders’ surplus (NPW:PS) and 

reserves to policyholders’ surplus. Using SAP, NAIC has established a 

“usual range” or benchmark for these financial indicators from studies of 

the ratios for companies that became insolvent or experienced financial 

difficulties in recent years. As part of its review process, NAIC compares 

insurers’ ratios with these benchmarks. We selected these two ratios 

because of the emphasis regulators place on insurance companies having 

an adequate amount of surplus to meet claims and because policyholders’ 

surplus is affected by the different accounting treatments used by RRGs.9

 

8

NAIC collects information on insurance companies through the annual and quarterly 

financial reports that insurance companies file and conducts analyses using financial ratios 

to identify companies that are likely to have financial difficulties. An NAIC database 

generates key ratio results, which cover indicators of financial condition such as 

profitability and liquidity, and serve as tools to determine the level of regulatory attention 

required for a particular insurer.

9

While the different accounting treatments affect these two ratios, they would not 

necessarily affect all of the analyses performed by NAIC.
Appendix III

Selected Differences between Statutory and 

Generally Accepted Accounting Principles as 

They Relate to Financial Reporting for RRGs

Page 103 GAO-05-536 Risk Retention Groups

Net Premiums Written to 

Policyholders’ Surplus Ratio

The NPW:PS ratio is one of the 12 ratios in NAIC’s Insurance Regulatory 

Information System (IRIS) and measures the adequacy of a company’s 

ability to pay unanticipated future claims on that portion of its risk that it 

has not reinsured.10 The higher the NPW:PS ratio, which is typically 

expressed as a percentage, the more risk a company bears in relation to the 

policyholders’ surplus available to absorb unanticipated claims. In other 

words, the higher the NPW:PS, the more likely an insurance company could 

experience difficulty paying unanticipated claims. Since surplus, as 

reflected by the availability of assets to pay claims, is a key component of 

the ratio, the use of GAAP, modified GAAP, or modified SAP instead of SAP 

may affect the results substantially. 

As shown in figure 12, each of the three RRGs has a lower NPW:PS ratio 

when the ratio is calculated using balance sheet information based on a 

modified version of GAAP than when the same ratio is based on SAP. In 

other words, under modified GAAP, each of these three RRGs would 

appear to have a greater capability to pay unanticipated claims than under 

SAP. However, one RRG (RRG from figure 9) is below the NAIC benchmark 

regardless of which accounting method is used. 

10IRIS is part of NAIC’s Financial Analysis Solvency Tools (FAST), a collection of analytical 

tools designed to provide state insurance departments with information to better screen and 

analyze the financial condition of insurance companies operating in their respective states. 
Appendix III

Selected Differences between Statutory and 

Generally Accepted Accounting Principles as 

They Relate to Financial Reporting for RRGs

Page 104 GAO-05-536 Risk Retention Groups

Figure 12: Differences in the Calculation of Net Premiums Written to Policyholders’ Surplus Ratio, Modified GAAP Compared 

with SAP 

Note: In some states, RRGs file under SAP, but can admit an LOC as an asset as a matter of permitted 

practice. This example assumes that such permitted practices are not present.

Some of the higher NPW:PS ratios under SAP could provide a basis for 

regulatory concern. NAIC considers NPW:PS ratios of 300 percent or less as 

“acceptable” or “usual.” However, according to NAIC staff, companies that 

primarily provide liability insurance generally should maintain lower 

NPW:PS ratios than insurers with other lines of business because 

estimating potential losses for liability insurance is more difficult than 

estimating potential losses for other types of insurance. Since RRGs only 

can provide liability insurance, NAIC staff believe a value above 200 

percent (in conjunction with other factors) could warrant further 

regulatory attention. Using this lower benchmark, two RRGs (from figures 

NAIC benchmark

capability to pay

unanticipated claims

Greater Lesser

capability to pay

unanticipated claims

Greater Lesser

NAIC benchmark

capability to pay

unanticipated claims

Greater Lesser

NAIC benchmark

Modified GAAP (current financials)

SAP (converted with adjusments)

NAIC benchmark

Policyholders'

surplus

(PS)

Net

premiums

written

(NPW) NPW:PS ratio

Dollars

RRG

from 

figure

9

RRG

from 

figure

11

RRG

from 

figure

10

Modified GAAP (current financials)

SAP (converted with adjusments)

NAIC benchmark

Modified GAAP (current financials)

SAP (converted with adjusments)

NAIC benchmark

968,030 365,524 265%

300%

968,030 683,656 142%

9,314,922 797,648 1,168%

300%

9,314,922 2,661,398 350%

3,058,107 26,694 11,456%

300%

3,058,107 2,603,656 117%

NAIC (benchmark)

SAP

Modified GAAP

NPW:PS Ratio

Source: NAIC.
Appendix III

Selected Differences between Statutory and 

Generally Accepted Accounting Principles as 

They Relate to Financial Reporting for RRGs

Page 105 GAO-05-536 Risk Retention Groups

9 and 11) meet the benchmark criteria under modified GAAP, but all three 

RRGs fail to meet the benchmark under SAP. Thus, an analysis of an RRG’s 

financial condition as reported under modified GAAP could be misleading, 

particularly when compared with other insurers that report under SAP.

Reserves to Policyholders’ 

Surplus Ratio

The reserves to policyholders’ surplus ratio is one of NAIC’s Financial 

Analysis Solvency Tools ratios and represents a company’s loss and loss 

adjustment expense reserves in relation to policyholders’ surplus.11 This 

ratio, which is typically expressed as a percentage, provides a measure of 

how much risk each dollar of surplus supports and an insurer’s ability to 

pay claims, because if reserves were inadequate, the insurer would have to 

pay claims from surplus. The higher the ratio, the more an insurer’s ability 

to pay claims is dependent upon having and maintaining reserve adequacy. 

Again, surplus is a key component of the ratio and the use of GAAP, 

modified GAAP, or modified SAP rather than SAP could affect the ratio. 

As shown in figure 13, each of the three RRGs has higher reserves to 

policyholders’ surplus ratios when the calculations are derived from 

balance sheet numbers based on SAP rather than modified GAAP. Under 

the modified version of GAAP, each of the three RRGs reports higher levels 

of surplus and consequently less risk being supported by each dollar of 

surplus (a lower ratio) compared with SAP. 

11A company’s loss reserves represent the estimated liability for outstanding insurance 

claims or losses that have occurred but have not been reported as of a given evaluation date. 

Loss adjustment expenses are the expenses incurred in investigating and settling such 

claims or losses and insurers also establish reserves for these expenses. The sum of the two 

reserves represents the total reserves for unpaid losses and the expenses incurred in 

investigating and settling them.
Appendix III

Selected Differences between Statutory and 

Generally Accepted Accounting Principles as 

They Relate to Financial Reporting for RRGs

Page 106 GAO-05-536 Risk Retention Groups

Figure 13: Differences in the Calculation of Reserves to Policyholders’ Surplus Ratio, Modified GAAP Compared with SAP 

Note: In some states, RRGs file under SAP, but can count an LOC as an asset as a matter of permitted 

practice. This example assumes that such permitted practices are not present. 

Higher reserves to policyholders’ surplus ratios could provide a basis for 

regulatory concerns. According to NAIC, ratios of 200 percent or less are 

considered “acceptable” or “usual” for RRGs. However, although the RRG 

from figure 11 meets NAIC’s benchmark under modified GAAP, it 

significantly exceeds NAIC’s benchmark when the ratio is calculated based 

on SAP—a condition that could warrant further regulatory attention. 

Risk-Based Capital NAIC applies risk-based capital standards to insurers in order to measure 

their capital adequacy relative to their risks. Monitoring capital levels with 

other financial analyses helps regulators identify financial weaknesses. 

However, since risk-based capital standards are based on SAP, numbers 

used to calculate capital adequacy that are derived from any other 

NAIC benchmark

capability to pay

unanticipated claims

Greater Lesser

capability to pay

unanticipated claims

Greater Lesser

NAIC benchmark

capability to pay

unanticipated claims

Greater Lesser

NAIC benchmark

Modified GAAP (current financials)

SAP (converted with adjusments)

NAIC benchmark

Policyholders'

surplus (PS)

Reserves

(R) R:PS ratio

Dollars

RRG

from 

figure

9

RRG

from 

figure

11

RRG

from 

figure

10

Modified GAAP (current financials)

SAP (converted with adjusments)

NAIC benchmark

Modified GAAP (current financials)

SAP (converted with adjusments)

NAIC benchmark

37,807 365,524 10%

200%

37,807 683,656 6%

10,452,990 797,648 1,310%

200%

10,452,990 2,661,398 393%

3,814,446 26,694 14,290%

200%

3,814,446 2,603,656 147%

NAIC (benchmark)

SAP

Modified GAAP

R:PS Ratio

Source: NAIC.
Appendix III

Selected Differences between Statutory and 

Generally Accepted Accounting Principles as 

They Relate to Financial Reporting for RRGs

Page 107 GAO-05-536 Risk Retention Groups

accounting basis (GAAP, modified GAAP, or modified SAP) could distort 

the application of the standards and make resulting assessments less 

meaningful. 

NAIC uses a formula that incorporates various risks to calculate an 

“authorized control level” of capital, which is used as a point of reference. 

The authorized control level is essentially the point at which a state 

insurance commissioner has legal grounds to rehabilitate (that is, assume 

control of the company and its assets and administer it with the goal of 

reforming and revitalizing it) or liquidate the company to avoid insolvency. 

NAIC establishes four levels of company and regulatory action that depend 

on a company’s total adjusted capital (TAC) in relation to its authorized 

control level, with more severe action required as TAC decreases. They are

• Company action level. If an insurer’s TAC falls below the company 

action level, which is 200 percent of the authorized control level, the 

insurer must file a plan with the insurance commissioner that explains 

its financial condition and how it proposes to correct the capital 

deficiency.

• Regulatory action level. If an insurer’s TAC falls below the regulatory 

action level, which is 150 percent of its authorized control level, the 

insurance commissioner must examine the insurer and, if necessary, 

institute corrective action.

• Authorized control level. If an insurer’s TAC falls below its authorized 

control level, the insurance commissioner has the legal grounds to 

rehabilitate or liquidate the company.

• Mandatory control level. If an insurer’s TAC falls below the mandatory 

control level, which is 70 percent of its authorized control level, the 

insurance commissioner must seize the company.

Because the differences between GAAP and SAP, as well as the 

modification of both accounting bases, affect an RRG’s capital, the 

differences also affect the TAC calculation for an RRG, and when 

compared to the control levels, could lead an analyst to draw different 

conclusions about the level of regulatory intervention needed. For 

example, in table 2, we place the three RRGs that we have been using as 

examples in the action categories that would result from calculating each 

TAC under the two accounting methods or their variants. The accounting 

methods used have no effect in terms of regulator action for the first RRG 
Appendix III

Selected Differences between Statutory and 

Generally Accepted Accounting Principles as 

They Relate to Financial Reporting for RRGs

Page 108 GAO-05-536 Risk Retention Groups

(because the RRG maintained a TAC level of more than 200 percent of the 

authorized control level). The other two RRGs change to categories that 

require more severe actions. 

Table 2: Differences in Regulatory Actions When Calculating Risk-Based Capital for Three RRGs, Modified GAAP Compared 

with SAP

Source: GAO analysis of NAIC data.

Note: In some states, RRGs file under SAP, but can admit an LOC as an asset as a matter of permitted 

practice. This example assumes that such permitted practices are not present.

Current financials (modified GAAP) With adjustments converting to SAP

RRG from figure 9 No action required No action required

RRG from figure 10 Regulatory action level Mandatory control level

RRG from figure 11 No action required Mandatory control level
Page 109 GAO-05-536 Risk Retention Groups

Appendix IV

Liquidated Risk Retention Groups (RRG), 

from 1990 through 2003 ApendxiIV

Liquidation status

Amount of claims paid on each dollar of 

loss and overall loss, as measured in 

dollarsb

Name of RRG

and state of domicile

Date business 

commenced

and type of coverage 

provideda Start date

Open/

closed

Closed

liquidations

Open liquidations 

(estimates)

National Warranty 

Insurance RRG

(Cayman Islands)

1984

Contractual liability 

insurance arising from 

extended service 

contracts

2003 

August

Open As of 2003, the 

liquidators reported 

that losses could 

reach about $74 

million. The liquidators 

have not updated their 

loss estimate since 

2003. 

Doctors Insurance 

Reciprocal, RRG (DIR)

(Tenn.)

1990

Medical malpractice 

for physicians

2003

June

Open As of May 2005, timely 

claims against the 

RRG numbered 1,990 

but it is not known 

what percentage of 

approved claims will 

be paid. c

American National 

Lawyers Insurance 

Reciprocal RRG 

(ANLIR) (Tenn.)

1993 

Malpractice for 

lawyers

2003

June

Open As of May 2005, timely 

claims against the 

RRG numbered 2,420 

but it is not known 

what percentage of 

approved claims will 

be paid.d

The Reciprocal Alliance, 

RRG (TRA)

(Tenn.)

1995

Malpractice for 

healthcare liability 

providers, including 

institutions, such as 

hospitals, and 

individuals, such as 

doctors

2003

June

Open As of May 2005, timely 

claims against the 

RRG numbered 2,150, 

but it is not known 

what percentage of 

approved claims will 

be paid.e

Heritage Warranty 

Mutual Insurance, RRG, 

Inc.

(Hawaii) 

1999

Contractual liability 

insurance arising from 

extended service 

contracts for the cost 

of automobile repairs

2002

September 

Open As of July 2005, the 

liquidation was 

expected to be closed 

within a few months. 

No claims have been 

paid yet for the 

unauthorized 

insurance. 
Appendix IV

Liquidated Risk Retention Groups (RRG), 

from 1990 through 2003

Page 110 GAO-05-536 Risk Retention Groups

Commercial Truckers 

RRG Captive Insurance

Company

 (S.C.)

2001 

February

Commercial truckers 

liability

2001

September 

Open As of May 2005, the 

receivership estimated 

that the RRG had 

about 350 outstanding 

claims, valued at 

about $6 million. The 

receiver expected to 

pay claims at 50 cents 

on the dollar.

Nonprofits Mutual RRG, 

Inc. (Vt.) 

1991

Liability insurance for 

nonprofit service 

providers

2000

June

Open As of July 2005, the 

overall estimated loss 

was undetermined. 

Claims are being paid 

at 86 cents on the 

dollar. 

Osteopathic Mutual 

Insurance Company 

RRG, Inc.

(Tenn.)

1986

Medical malpractice 

for osteopathic 

physicians

1996

December

1998

March

The RRG’s business 

was assumed by 

another insurance 

company, pursuant to 

an approved plan of 

rehabilitation.

Beverage Retailers 

Insurance Company 

RRG (Vt.)

1988 

Liability for licensed 

alcoholic beverage 

retailers

1995 

July

Open As of July 2005, the 

overall loss estimate 

was about $1.5 million. 

Claims have been paid 

at 82.5 cents on the 

dollar.

North American 

Physicians Insurance 

RRG (Ariz.)

1989

Medical malpractice

for cosmetic, plastic, 

and reconstructive 

surgeons

1995

January 

Open As of April 2005, the 

overall loss was 

estimated at $4.2 

million with about 260 

claims filed. 

Distribution to date is 

32 cents on the dollar 

and may increase to 

42 cents on the dollar.

U.S. Physicians

Mutual RRG

(Mo.) 

1989

Medical malpractice 

for orthopedic 

surgeons

1994

February 

Open (but 

expected to 

close soon)

As of June 2005, 

claims were expected 

to be paid at 63 cents 

on the dollar. f

(Continued From Previous Page)

Liquidation status

Amount of claims paid on each dollar of 

loss and overall loss, as measured in 

dollarsb

Name of RRG

and state of domicile

Date business 

commenced

and type of coverage 

provideda Start date

Open/

closed

Closed

liquidations

Open liquidations 

(estimates)
Appendix IV

Liquidated Risk Retention Groups (RRG), 

from 1990 through 2003

Page 111 GAO-05-536 Risk Retention Groups

Professional Mutual 

Insurance Company 

RRG

(Mo.) 

1987

Medical malpractice 

to physicians

1994

April 

Open but 

expected to 

close soon

Claims paid in full.

National Dental

Mutual Insurance Co., a 

RRG

(Colo.) 

1987

Malpractice insurance 

for dentists

1997

April

Open As of June 2005, the 

claims were expected 

to be paid in full. 

HOW Insurance 

Company, A RRG

(Va.) 

1981

Contractual liability 

insurance arising from 

extended service 

contracts for the cost 

of home repairs

1994

October 

Open The claims have been 

paid in full, and the 

receivership is 

expected to close in a 

few years.

Transportation

American Group, Inc., 

an Insurance RRG 

(Hawaii) 

1992

Commercial 

automobile liability 

insurance for taxicab 

drivers

1994

July 

Closed

2000

February

Claims paid in full. 

Charter RRG Insurance 

Company (Neb.)

1987

Automobile and 

garage liability 

insurance to persons 

engaged in the 

automobile rental 

industry 

1992

December 

Closed

1997

December

The overall loss was 

about $6 million, and 

claims were paid at 

75 cents on the 

dollar.

United Physicians 

Insurance, RRG (Tenn.) 

1989

Medical malpractice

insurance for 

physicians

1992

July 

Closed

2005

July

The loss was 

estimated at $5 

million, and claims 

were paid at 65 cents 

on the dollar. 

Physicians National 

RRG (La.) 

1987

Medical malpractice

1991

November 

Open As of July 2005, 

claims were being paid 

at 50 cents on the 

dollar and will pay an 

estimated additional 7 

cents at closing. The 

overall estimated loss 

is about $27 million. 

(Continued From Previous Page)

Liquidation status

Amount of claims paid on each dollar of 

loss and overall loss, as measured in 

dollarsb

Name of RRG

and state of domicile

Date business 

commenced

and type of coverage 

provideda Start date

Open/

closed

Closed

liquidations

Open liquidations 

(estimates)
Appendix IV

Liquidated Risk Retention Groups (RRG), 

from 1990 through 2003

Page 112 GAO-05-536 Risk Retention Groups

Sources: NAIC, state regulators, liquidators, and public documents.

Note: This table provides information about the 21 RRGs that have been liquidated. RRGs that have 

been liquidated meet NAIC’s definition of “failure.” Using NAIC’s definition of failure, one other RRG 

can be categorized as failed because it was placed into receivership. However, because this RRG was 

not liquidated, we have not included it in our table. 

a

For the date on which each RRG commenced business we obtained data for most RRGs from NAIC.

b

The information contained in this table is based on information we obtained from state regulators or 

liquidators. However, these sources were not always able to provide us the same types of information.

c

According to a Tennessee official, as of December 31, 2004, DIR had approximately $5 million in 

assets and $115 million in liabilities in expected losses for policy claims.

d

According to a Tennessee official, as of December 31, 2004, ANLIR had approximately $6 million in 

assets and $91 million in liabilities in expected losses for policy claims.

e

According to a Tennessee official, as of December 31, 2004, TRA had approximately $17 million in 

assets and $61 million in liabilities in expected losses for policy claims.

f

As of July 2005, no estimate of the overall losses was available.

National Auto Mutual 

Insurance Co., a RRG 

(N. Mex.) 

1989

Commercial auto 

liability insurance

1991

August 

Open Payments have been 

made at 60 cents on 

the dollar, with a 

possible final 

distribution of 4 cents 

on the dollar.

Petroleum Marketers 

Mutual Insurance 

Company, A RRG 

(Tenn.) 

1988

Liability insurance for 

the environmental 

clean-up of 

underground storage 

tanks

1990

May 

Open Liquidated claims have 

been paid in full, and 

money has been 

reserved to pay the 

estimated amount of 

unliquidated claims 

(as they become 

payable). 

Rent Rite Advantage 

Services, Inc., a RRG 

(N. Mex.) 

1987 

Commercial vehicle 

liability insurance for 

rental cars

1990

March 

Closed The overall loss 

estimate is $945,000, 

and claims were paid 

at 61 cents on the 

dollar. 

(Continued From Previous Page)

Liquidation status

Amount of claims paid on each dollar of 

loss and overall loss, as measured in 

dollarsb

Name of RRG

and state of domicile

Date business 

commenced

and type of coverage 

provideda Start date

Open/

closed

Closed

liquidations

Open liquidations 

(estimates)
Page 113 GAO-05-536 Risk Retention Groups

Appendix V

Comments from the National Association of 

Insurance Commissioners ApendxiV

NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS 

EXECUTIVE 

HEADQUARTERS

2301 MCGEE STREET

SUITE 800

KANSAS CITY MO 

64108-2662

VOICE 816-842-3600

FAX 816-783-8175

GOVERNMENT

 RELATIONS

HALL OF THE STATES

444 NORTH CAPITOL STNW

SUITE 701

WASHINGTON DC

20001-1509

VOICE 202-624-7790

FAX 202-624-8579

SECURITIES 

VALUATION 

OFFICE

48 WALL STREET

6TH FLOOR

NEW YORK NY

10005-2906

VOICE 212-398-9000

FAX 212-382-4207

WORLD

WIDE WEB

www.naic.org

July 21, 2005 

Richard J. Hillman, Director 

Financial Markets and Community Investment 

Government Accountability Office 

441 G. Street N.W. 

Washington, DC 20548 

RE: GAO Report on Risk Retention Groups 

Dear Mr. Hillman: 

The National Association of Insurance Commissioners (NAIC) appreciates this opportunity to 

review the GAO draft report on Risk Retention Groups. As you know, the NAIC is a voluntary 

organization of the chief insurance regulatory officials of the 50 states, the District of Columbia 

and five U.S. territories. The association’s overriding objective is to assist state insurance 

regulators in protecting consumers and helping maintain the financial stability of the insurance 

industry by offering financial, actuarial, legal, computer, research, market conduct and 

economic expertise. Formed in 1871, it is the oldest association of state officials. 

Several members of the NAIC staff and Director L. Tim Wagner in his capacity as chair of the 

NAIC’s Property and Casualty Insurance Committee reviewed the draft report and a consensus 

opinion among them was that the report was well thought out and well documented. The 

research methods employed were solid and the results obtained were carefully interpreted to 

obtain a clear picture of how states are undertaking their responsibilities with regard to 

regulation of risk retention groups. It explored the issues that are pertinent to the protection of 

risk retention group members and the third party claimants that are affected by the coverage 

provided by the risk retention groups. 

Overall, the reviewers believed that the report was materially accurate. The reviewers agree 

with the recommendations contained in the report for Congress and for insurance regulators. 

Attached to this letter are several editorial suggestions and clarifications that we believe would 

improve the final document. 

Thanks again for all your hard work in making government accountable to the public that it 

serves. 

Sincerely, 

Catherine J. Weatherford 

Executive Vice President & CEO 
Page 114 GAO-05-536 Risk Retention Groups

Appendix VI

GAO Contact and Staff Acknowledgments ApendxiVI

GAO Contact Richard J. Hillman (202) 512-8678

Staff 

Acknowledgments

Lawrence D. Cluff was the Assistant Director for this report. In addition, 

Sonja J. Bensen, James R. Black, William R. Chatlos, Tarek O. Mahmassani, 

Omyra M. Ramsingh, and Barbara M. Roesmann made key contributions to 

this report.

(250167)
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